With golf course superintendents ever increasing interests in renewing maintenance equipment fleets before they become a parts, labor and downtime headache, leasing has become more popular than ever. Here are some facts on what The Lease Rate Factor means and perhaps will give you better bargaining power when it comes to negotiating a lease for new equipment. The lease rate factor is basically the interest rate you are leasing a piece of equipment for. The lease rate factor is calculated by taking the actual bank interest rate of the loan and dividing it by 2400, resulting in a decimal based number. For example an equipment lease with a 7% loan has a Lease rate factor of .0029. Using a Lease rate factor instead of an interest rate makes it easier to quickly calculate the interest portion of a machinery lease calculation. For instance, if you're leasing a fairway mower with a negotiated price of $24,000 and residual value of $12,000, your interest is calculated by adding them together ($36,000) and multiplying it times the Lease rate factor (.0029); so, the interest portion of your payment is $104.40. ($36,000 X .0029) = $104.40 The $104.40 represents the interest portion of your monthly fairway mower payment. If you want to know the total amount of interest you'll pay, simply multiply the monthly interest amount by the number of months in your lease term. So, for a 36 month lease, your total interest over the lease term would be $3,758.40: ($104.40 x 36). Despite its complicated sounding name, the lease rate factor is really a very simple calculation. Why is the Lease Rate Factor Important? A lower interest rate always results in a lower monthly payment. As you can see from my example above, however, the interest portion on a lease is a relatively small portion of the lease payment. The larger chunk of the fairway mower lease payment is based on the machinery depreciation expense which is the difference between the fairway mowers price you agree to pay and its residual value at the end of the lease term. Just like a regular machinery purchase, negotiate your best actual price; this is the best way to lower your lease payment. Can You Negotiate the Lease Rate Factor? The Lease rate factor, like the residual value, is subject to the terms of the bank or leasing company and their discretion. While you cannot directly negotiate the lease rate factor, is in your dealer's best interest to work with the bank that will make your desired monthly payment possible. A good lease deal is based on a low average machine payment. Getting a reasonable interest rate only represents about 1/3rd of the challenge in bringing down those monthly payments. There is nothing wrong, however, with asking your dealer for the lease rate factor. How Can I Get the Best Lease Deal Your monthly lease payment, in part, is calculated by taking the machines capitalized cost (the price you agreed to pay for the machine) and subtracting it from your machines estimated resale value at the end of the lease term. The difference is the deprecation portion of your lease payment. In the case of the fairway mower above, the depreciation cost would be $333.33 or ($24,000 - $12,000) / 36. As you can guess, a higher residual value will lower your depreciation costs which in-turn will lower your monthly payments. The total three year lease payment for the fairway mower is Depreciation Expense ($333.33) + Monthly Lease rate factor ($104.40) = $437.73. Before signing on the dotted line negotiate you best purchase price for the best lease payment, most often the other cost involved in a lease will be determined by the leasing company the dealer or you club works with. Now go get some new IRON. |