What is a lease?
Leasing is a great option to enable access to goods or assets when you cannot afford to purchase them. Leasing can include rental-type arrangements or leasing to purchase at a later date. In either case, a lease agreement specifies the contractual arrangements between the owner of the asset, and the person looking to use or purchase the asset.
A lease is an agreement between 2 parties. The lessor is the owner of the leased good. The lessee is the person who wishes to pay for use of the good or property.
Assets or goods have an overall market value throughout their useful lives. Some assets appreciate in value, such as residential properties, or vintage cars, and some depreciate over time, such as day-to-day cars, tools, and equipment. The nature of an asset has a bearing on its value in a lease agreement, and particularly a lease-to-buy agreement.
The first step to a good leasing arrangement is to be sure you know everything about the value of the good or asset, such as the value of similar goods, and the rate at which the item or asset is expected to depreciate. Understand if the good or asset has any flaws and make sure this is transparent to both parties. A lease agreement is specified to include the names and domicile of the parties and the lease term. This includes start dates, end dates, payment dates, and any other conditions or processes to be followed in cases of disagreement, cancellation, renewal, repairs, and maintenance.
What’s in a lease?
There are several aspects to a lease arrangement. In such a contractual agreement, the lessee pays the lessor for the use of a good or asset. Examples include a rental agreement for property or buildings, the lease of a car, or potentially smaller goods such as furniture or equipment.
In general, a lease involves regular payments at specified intervals, and an overall time period is agreed upon for the overall duration of the lease.
Lease agreements are binding for the agreed-upon period. Thus, unlike a rental agreement, which can be conducted on a month-to-month basis, a lease agreement will apply for the duration of the period, and an early departure does not allow the lessee out of the agreed payment arrangement. Even in the case of early termination of the lease, the lessee is still liable for the total amount of the 12-month (for example) agreement.
The formula can also be applied, however, where the lease forms part of a contractual agreement for an eventual purchase. Alternatively, at the end of an agreed lease period, the lessor and lessee may come to an agreement of sale based on the residual value of the good, which is the time and depreciation-dependent value of the good at the time of the end of the lease. The residual value can be paid in full, or the contracting parties may decide to distribute this payment over time, with interest, while the lessee continues to use the good or asset.
In this case, we use an interest rate to calculate the value of each remaining payment given the deposit or down payment made, the number of payments, the total value of the asset, and the length of time given to pay the total amount, less the down payment. Understanding these parameters will allow you to make the most informed lease-to-buy arrangement. Given the interest rate, you can begin to make a calculated decision regarding the sacrifices you might make to pay off the capital amount sooner in order to save money in the long run.
The parameters of the calculator thus include the following:
Product Value: This is the total market value of the good at the time the arrangement is made.
Down Payment: This is the initial amount set down in cash at the start of the agreement. Remember, the greater the down payment, the more you will save on interest!
Lease Amount: This is the amount of the total which will be broken up into periodic payments with interest. This means that this amount is equal to the Product Value, less the Down Payment.
Residual value: The residual value is the value of the good or asset at the end of the lease period. This value is really important in the case where one wishes to purchase a depreciating asset at the end of the lease term. For example, if you have been leasing your vehicle and wish to purchase it at the end of the lease term. This is usually determined at the start of the lease period based on the expected rate of depreciation over the period, as a % of the total Product value.
To use this calculator,
1. Enter the product value of the asset you would like to lease.
2. If you are making a deposit or down payment, you can enter this, either as a percentage of the total value or as a fixed amount.
3. Next, estimate the residual value by considering the rate of depreciation, or any potential for price inflation (which could increase market value), or appreciation, if it that kind of asset.
4. Enter the agreed interest rate.
5. Finally, enter the lease term.
The lease calculator will calculate the monthly payments, the total value of the payments you will be making, the total interest you will pay over the lease period, and the total cost to own the leased property.
This calculator will enable you to calculate either the total amount you will pay given the monthly payments and interest rates. You will also be able to compute the monthly payments given the total value, the deposit amount or down payment and the interest rate.
The cost of a lease
When you are about to lease a piece of equipment or property, you may want to know what the total value of the lease is, or what the lease is going to cost you overall. This makes it easier to determine your affordability, both incrementally and overall.
A few notes on leasing
Since lease agreements are binding, it is a good idea to check the term thoroughly. What are the specific conditions of the lease? What are the penalties for exiting the lease early? Are there any conditions on the interest rate? It is equally important to check the condition of the good or asset you are leasing and be clear of liability in various circumstances. Some leases, which pertain to rental agreements, involve refundable deposits. You can also find out the rate of interest earned while the lessor holds the deposit. The point of a lease agreement is to protect both parties, so it is a good plan to maintain a positive relationship with the other parties in the agreement, whether you are a lessor trying to secure an income against an asset or a lessee looking to use an asset for an extended period. Sound financial decisions are about people, not just numbers!