What sort of impact does interim rent payment have on your equipment lease rates?
Leasing to meet the financing needs of a business can prove to be the right solution. However, if leasing is being considered as an equipment financing option, then factors that may play a big role in making your leasing agreement costly, such as interim rent payment, should be kept in mind. You should avoid getting deceived by a low equipment rate, because you cannot just take a look at the lowest price and be able to judge the actual value of your lease.
How Are Equipment Leasing Rates Affected By Interim Rent Payment?
Many business owners end up falling for false equipment leasing assumptions, which leads them to believe that they are entering into the most competitive lease transaction. The interim rent is often not taken into consideration by most lease calculations. Basically, interim rent payment is the amount of rent that will be charged by an equipment leasing company from the moment the leasing agreement is accepted until the official starting date of the lease period. Most leases begin soon after the equipment has been accepted, usually on the following month’s very first day.
For a lease with monthly payments, the monthly payments can be multiplied by the number of days in the interim period to determine the interim rent. The answer should be divided by 30. In certain cases, nearly an entire periodic payment may get added to the lease because of the interim rent. This can lead to a dramatic increase in the effective lease.
In extreme cases, interim rent payment can impact equipment leasing rates to a significant extent. For instance, assuming that a 36-month lease for equipment has been accepted, the cost of which is $200,000 and a payment of $6,226 has to be made every month. Assuming that it happens to be a capital lease, which means that the equipment is intended to be purchased at $1 by the time the lease ends. This translates to an 8% effective lease rate.
Now, assuming that there is a 30-day interim lease period, and those 30 days are added to the lease period. The effective lease rate for 37 months would consequently increase to 9.7%. Generally, the higher rate happens to be a trap, which means that the leasing agreement will end up costing you more in the long run, while your lessor will earn a higher return.
Is The Interim Period Really Necessary?
You might be curious that if they interim period simply leads to an increase in your equipment leasing rates, then does it serve any other purpose or is it even necessary. According to many equipment leasing companies, they have to commit themselves to pay for equipment from vendors on the behalf of their clients or customers. So they believe that interim rent serves as compensation for that commitment. They claim that it is justifiable for you start using the equipment as soon as the interim period begins.
However, this reasoning not as justifiable as it may seem because the interim rent is based on the periodic lease payment instead of on your borrowing rate. A leasing company should not be using the periodic payment as a standard for the calculation of interim rent because there is a return-of-capital associated with each lease payment. It is fairer to calculate the interim rent on the basis of the borrowed rate.
Another thing that you and many other lessees do not realize is that their equipment lessors usually do not have to pay for the equipment until the interim period ends. This means that no additional cost is incurred by them during the interim period. The result is that a significant increase is incurred in your equipment leasing rates, while your lessor is able to earn some extra cash. It does not take very long for a competitive lease to turn into a very expensive one if you are not careful.
Can Interim Rent Be Prevented From Becoming A Problem?
Indeed, it is not necessary for you to pay interim rent and by not paying it, your equipment leasing rates will not be affected. First, a lease that has no interim rent should be negotiated. Although equipment leasing companies will likely not agree have the interim removed altogether, you can just negotiate to pay part of the interim rent during the payment period as a part of your monthly payments. You can also negotiate to pay the other half of the interim rent after the lease ends.
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Therefore, understanding the interim rent and the big role that it plays in making your leasing agreement costly is very important when leasing equipment. The lease should be reviewed carefully and negotiations should be carried out where necessary. Even if the lessor does not agree to get the interim period eliminated, there are still ways to blunt the impact that the interim rent can have on your leasing rates.
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