The inputs that set the payment
Every lease quote is built from the same handful of numbers. Ask for each of them in writing, because changing any one of them changes what you pay.
- Equipment cost: the cash price of the equipment being leased.
- Lease rate: the annual interest rate built into the lease, which is often not stated on the quote.
- Term: the number of monthly payments, commonly 24 to 60.
- Residual or buyout: what you pay to own the equipment at the end, such as $1, 10%, or fair market value.
- Payments in advance: whether the first (or first and last) payment is due at signing.
The formula
Lenders use the standard time-value-of-money payment formula: the equipment cost, minus the present value of the residual, spread over the term at the lease rate. A lower residual means a higher payment, because you are paying off more of the equipment during the lease. When payments are due in advance, each payment is slightly lower, but you pay one sooner.
A worked example
Take $3,000 of equipment on a 48-month lease with a $1 buyout and the first payment due in advance. At a 14% lease rate the payment is roughly $81 a month, about $3,900 over the term before taxes and fees. Run your own numbers in the equipment lease calculator, which shows the payment, the total cost, and how it compares with buying.
Working backward from a quote
Many quotes show only a monthly payment. With the price, term, and buyout, you can solve for the implied interest rate. This is the most useful check on a lease, because a small monthly payment can hide a high rate. In the calculator, choose “A quoted monthly payment” to see it.
Costs that are added to the payment
Sales tax is often charged on each lease payment. Many leases also add a monthly insurance or equipment protection fee, a one-time documentation fee, and late fees. Add these to the base payment to get what you actually pay each month.
