Some leasing companies are increasing their rates for the first time in many years. Does this mean interest rates must be increasing if lease rates are going up? No.
Since the year 2000, long-term interest rates have dropped dramatically. In 2000 the three-year Treasury Constant Maturity was 6.22%. In October 2009 that same rate was 1.46%, a drop of 476 basis points.
Rates are set by companies based on a number of factors. Many of today’s increases are due to the entire lending and economic condition of our country. Leasing is not exempt.
If the cost of money is down, why are lease rates increasing?
When you do a lease vs. buy analysis, it’s important to understand the 10 components that go into a rate factor.
1. Cost of Funds: At what interest rate does the leasing company borrow its funds? If the bank is in trouble, it may have a high borrowing rate.
2. Lease Term: How long is the lease length? Most range from 24-60 months. The longer the term, the higher the leasing company’s borrowing rate. These companies pass their higher borrowing costs to you in higher rates.
3. Residual: How much residual risk is the leasing company willing to take on the equipment? Technology equipment such as desktop and laptop computers, servers and storage equipment support 3% to 12%. The higher the residual, the lower the rate and your payment.
4. Resale Market: What is the condition of the used equipment resale market? With businesses failing at record rates, the used equipment market is flooded with repossessed and off-lease equipment. The more used equipment available, the lower the residual and the higher your payments.
5. Equipment Useful Life: If you are leasing long-term manufacturing equipment, your leasing company must understand long-lived assets. If it does not, it will offer you a shorter term and higher payments.
6. Deal Size: How much do you plan to borrow? Traditionally the more money you need, the lower the borrowing rate. The rate per $1,000 is higher to lease $100,000 than $1,000,000 of equipment.
7. Depreciation: Will the leasing company depreciate the equipment? If not, you will pay a higher rate than with a company that can utilize the depreciation.
8. Credit Strength: How financially strong is your company? The leasing credit market is in rough shape now. The Equipment Leasing and Finance Association’s (ELFA) monthly Leasing and Finance Index released December 23, 2009 reported that lease application volume for new lease business was down 7% compared to the same period in 2008. Leases over 30 days delinquent are up 15% and one in every three lease applications is declined. Read ELFA’s full press release at http://elfaonline.org.
9. Industry Expertise: If the leasing company does not understand your industry, trends and issues as well as the equipment, your application is more likely to be declined.
10. Manufacturer Support and Guarantees: Is the manufacturer guaranteeing the lease? If your company is financially weak, this is good. This guarantee often will gain you a lower payment.
And you thought it was only about interest rates!
Mary A. Redmond is an independent leasing specia