What are the financing rates when leasing? These are some of the questions business owners ask themselves when looking for equipment leasing companies.
Although the equipment financing industry in the U.S is very competitive, very many business owners are yet to understand exactly how equipment financing rates are calculated. They also do not understand how the rates can be managed and what factors actually affect monthly pricing.
Most lessees want the lowest rate, the best deal or the lowest monthly payments. There are some variables that are controlled by the lessor when determining what your rates will be but you too can control some of them.
The actual rate of financing in North America is determined by several factors. How the finance rates are presented into the structure of your lease agreement is critical. The timing of the actual cash flows that you pay out into your lease are important because it determines if you get the best rates or not.
What Are The Financing Rates When leasing?
In order for you to know what your financing rates are, you need to assess how some miscellaneous charges will impact you once the transaction is complete. There are certain fees such as legal fees, admin fees and even an appraisal if necessary, which can add up and have a huge overall impact on the final rate of your lease.
There are two basic types of leases used in the U.S; the operating lease and the capital lease. Leasing rates differ between the two transactions so depending on which one you choose, you may pay higher or lower rates. The capital leases tend to have higher rates as compared to operating leases.
The capital lease is the easiest lease to understand when you want to know what are the financing rates when leasing. It has five factors that you have to take note of: your end of lease payment/obligation, monthly payments, dollar size of your deal, interest rate and terms of your lease. If you are able to assess four of these factors, then you will be able to quickly determine what your finance rate is going to be. You can do this much more efficiently using a financial lease calculator.
When it comes to financing rates, the operating lease is a little different. You can actually be unable to determine what your finance rates are when you take up an operating lease. This is because with an operating lease, or a fair market lease, the lessor contributes some of their own funds into your transaction. They won’t tell you how much they have invested and this affects the amount being financed. In short, they make a down payment for you.
Fortunately, the operating lease will always have lower financing rates and if you do the math, you might even find that the interest rate is below zero percent. Remember that this is because the lessor has already made a down payment for you. The catch here is that just like all things in life, you will have to pay later because in an operating lease, you will be required to return the equipment or purchase it at the end of the lease.
When calculating lease interest rates, the timing of cash flow is very critical. You can dramatically change the profit on the lease transaction by adjusting payments to reflect annual or quarterly payments made by your business.
Your credit score will also determine your finance rates. While it is easy to find a leasing company willing to lease equipment to you with a damaged credit score, it will affect your financing rates. This is because businesses with low credit scores attract higher financing rates. The size and the nature of the equipment that you want to lease will also affect your rates.
Bottom Line
As you can see, many different factors go into equipment financing rates. Such factors include the type of lease transaction you sign and your credit score. You need to understand your lease up front before you sign it as it can either positively or negatively affect your interest charges. When trying to determine what are the financing rates when leasing, ensure that you talk to a trusted and credible financing advisor. They will help you to choose the best equipment financing rates in North America.
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