How is Lease Rate Affected?
What happens when you realize that leasing companies are suddenly increasing their rates? What has brought on the change out of the blue? Contrary to common misconception, higher interest rates don’t always mean more lease rates. With the advent of the new millennium, interest rates have not seen a sharp rise; they have mostly plummeted barring a few cases.
Lease rate is not calculated based on one factor – there are a several parameters involved. A lease vs. buy analysis will help you comprehend better:
- The leasing company borrows funds at a certain interest rate, but if the lending institution is in trouble of some sort, the borrowing rate is much higher.
- What is the duration of the lease? The longer the term, the more is the leasing company’s borrowing rate, which subsequently boosts the leasing rates in your case.
- A lot rides on the residual risk the leasing company wishes to take on the equipment. For example, if you consider technology equipment like laptops and desktops, the risk is from 3% to 12%. If the residual is high, the rate and your payment are low.
- How is “used equipment” performing in the resale market? When the market has an abundance of repossessed and off-lease equipment, the residual is lower and your payments increase.
- The size of the order matters – what is the volume you intend to borrow? The more money you require, the lesser is the borrowing rate.
- What is the shelf life of the equipment you want to lease? If the leasing company factors in long-lived assets such as long-term manufacturing equipment, then the payments will be lower. Also, it depends if the manufacturer is providing a guarantee where the lease is concerned since it can mean a lower payment.
- Ensure that the leasing firm understands the technicalities, your industry, issues, and trends. If that isn’t the case, they might not agree to lease the equipment to you – forget about getting a lower rate!
- If the leasing company doesn’t depreciate the equipment, you might have to end up paying a higher rate with a firm that can make use of the depreciation.
So now you know it is not just about interest rates! You can calculate the lease rate with an interactive calculator, but you have to study the current state of the leasing credit market as well, since trends can change any time.