One of the most common questions asked by potential lease customers relates to the Annual Percentage Rate (APR) associated with a lease contract. The reason for this question typically stems from the desire to compare the costs associated with the customers alternatives in obtaining this equipment. Since most people are familiar with loans and particular APR's most financing alternatives are compared under this criteria by customers. The problem with this formula is that the comparison is done strictly on the surface and does not give the customer the true cost of their financing alternatives. If the comparison is done correctly all variables are taken into consideration. By incorporating tax savings, pre-tax dollars vs. after tax dollars and the potential investment loss your comparison will show a true cost analysis between your financing alternatives.
Since a true equipment lease is merely a long term rental contract of the equipment there is no interest charged to the customer. An example that is familiar to the real estate industry would be to compare a commercial office lease with a commercial mortgage on the same building. The office lease can be structured on a short or long term contract and it gives you the ability to use the building for business needs. The lease payments made are expensed and usually requires no down payment. Since you are merely renting the building, the payments made are not broken down in terms of interest and principal. By contrast, if you purchase the same building you typically would be required to put a down payment and finance the balance. The payments would be broken down into principal and interest. Instead of expensing your monthly payment you would write off the depreciation and interest.
The major advantage of owning rather than leasing this building is the appreciation factor. If the building did not appreciate but instead depreciated in value, I doubt anyone would elect to invest in an asset that decreased in value each year.
Please contact us at tlc@totallease.com to request your personalized lease analysis.
