I am fortunate to be able to spend a great deal of time working with dealerships throughout the United States. I cannot take for granted the ground floor information I get from their sales and finance teams when creating solutions to fit their immediate and long-term needs.
As we all know, leasing has become a daily part of our lives inside the equipment sales world we live in. Yet, there is still a lot of mystery among salespeople on how and what really influences a lease payment. Both dealers and customers ask for the “highest residual” they can get, and believe that will result in the lowest payment available. In reality, it does play a large role, but there are a few more considerations to take into effect when figuring payments.
To understand the basics, compare these 4 factors when calculating lease options offered by various leasing companies:
- Residual percentage
- What you are basing the residual percentage off of
- Interest rate
- Payment terms
The residual percentage will determine how much of a machine’s sales price or value a customer will pay for over the term of the lease. Generally, the higher the percentage being used to factor the lease payment will usually reduce the payment amount, but that also must work in combination with the other factors.
The second factor that will influence payments is what the leasing companies are basing the residual percentage off of. Some leasing companies will allow you to base this residual percentage off the actual sales price. Others will only allow you to take it off dealer invoice cost for new equipment, trade value premium or resale cash value from an “iron guide.”
This makes a bigger difference than most people give it credit for. For example, if you are selling a piece of equipment for quite a bit more than the dealer invoice cost or the trade value premium, it may be the better option — resulting in lower monthly payments for the customer — if the leasing company will allow you to take the residual percentage off the sales price.
Likewise, if you are selling the equipment closer to the dealer invoice cost or trade value premium, it will be to your advantage (again resulting in lower monthly payments) if the leasing company factors the payment off these two values. This will be determined by the residual percentages for each, as well as the following two factors: interest rate and payment terms.
Interest rate is always important, but takes a lesser role when considering a lease vs. a normal finance contract. It becomes our third factor we need to look at in conjunction with the previous two. As always, the lower the rate, the less interest that is paid over the period of the lease. This is always going to be a positive, but you may find out that the lender with the lowest rate may not have the lowest payment option when comparing the same length of lease terms.
This is foreign to most people who finance equipment, because now there is the residual percentage that comes into play. I have seen lending companies have interest rates that are 1-2% higher than another company and still have lower payments because of the other pieces to the puzzle.
Lastly, the term will influence the payment as well, becoming the fourth factor, but less influential than the previous three. Most leasing companies will offer 3-5 year options, but there are others who will lease equipment in our Industry up to 90-months, or 7.5 years!
Most people will think a 7.5-year lease is crazy, but remember back in 2013 and 2014 when we were leasing brand new equipment for extremely low payments? This set up the customer’s expectation of what they should pay for this equipment. Customers who are educated on leases are still looking for these kinds of payments and, trust me, someone will offer it to them, so you must be in the game to compete these days.
All in all, there are many leasing companies offering lease options to their dealers and customers. If you are only evaluating a few companies, you may be missing a lot of deals. You need to look at all four of these factors in conjunction with each other.
A lot of times it is not as simple as it should seem. There is a swift learning curve here and once you think you have it figured out, changes creep into the game, and adjustments are needed. Stay on top of this as I think we all know leasing is not going away soon, considering the increasing costs of equipment and extreme competition in the market today and for the foreseeable future.