The Bottom Line: Understanding Your Monthly Payment and Cost of Loan

The Bottom Line: Understanding Your Monthly Payment and Cost of Loan

How to Evaluate Your Lease and Make the Best Choice for Your Business

Financing can be confusing and, yes, kind of boring. It does pay to understand a few things though, especially when it relates to saving on your monthly lease payments.

Give yourself an advantage by understanding the breakdown of monthly payments. There are a lot of moving parts in a lease. If you just compare payment amounts, you may not be getting the full picture.

Your lease term, end of lease agreement, inspection or transport fees, down payment and interest rate all go into determining your monthly payment. Let’s take a closer look at the factors that go into determining your monthly payment.

End of Lease Agreements

When signing your lease, you will be offered a number of end of lease options. Your choice affects not only what happens to the equipment at the end of your lease term, but also what you pay monthly over the course of the lease.

The most common end of lease agreements are purchase (lease to own), trade-up and continuing rental. Even within the agreements there are important variations. For example, a lease to own contract that stipulates a 10% buyout will come with a higher monthly payment then a fair market value (FMV) contract because you are paying down a higher percentage of the equipment cost monthly.

Inspection and Transport Fees

Often a purchase needs to be moved and inspected at the time of sale. A good lease can roll those expenses into your monthly payments, breaking the cost down over the term of the lease and lowering your up-front cash expenses. The amount this adds to your monthly payments varies with the cost of the fees.

Down Payments

No down payments can be very useful to offset initial costs. Of course, if you do choose to (or must) make a down payment, the amount you pay should come out of the equipment cost and that in turn should lower your monthly payments. For some businesses this is a benefit. They choose to pay more upfront in exchange for lower payments in the future.

Term Lengths

Term length can be anywhere from 2 to 6 years, with 5 years being the most common term. Like most financing situations, the longer your term length means a higher cost of loan but lower payments. Likewise, shorter lease terms will come with a lower cost of loan but higher payments.

It’s important to weigh what is more important to you: lower payments or shorter term.

A lower payment is obviously beneficial and most business owners want the lowest payment they can get. However, a shorter term means that, over the term, you are actually spending less to acquire your equipment. There’s legitimate cost savings from both options.

Cost of Equipment

It goes without saying that the more your equipment is worth, the higher your monthly payment is likely to be. You can adjust your monthly costs through term length or end of lease agreements, but ultimately your lease payments will be based on the value of the equipment you want to lease.

Interest Rates and Cost of Loan

Nothing in this world is free, and financing is no exception. Leases come with interest. You are benefiting from the use of the financing company’s funds and in return they charge interest on the amount you borrow. The amount you pay in interest to the lender is largely determined by your credit score and expected rate of depreciation on the equipment.

The cost of the loan is the total amount you pay over the entire lease term above the purchase value of the equipment.

Let’s look at a typical scenario:

Your business needs to purchase a mid-size excavator. You lease a $100,000 excavator over 5 years (60 payments). Your monthly payment is $1,980 a month. At the end of the loan, you have paid $118,800 in total (1,980 x 60 = 118,800). The $18,800 over the $100,000 purchase price is considered the cost of the loan.

The Right Monthly Payment for Your Business

Get the full value of business equipment at an affordable monthly payment with the flexibility to choose your payment plan.

Thomcat Leasing knows small business, knows equipment, and knows the Canadian financing market. For over 30 years, we’ve been finding solutions for businesses just like yours. Get a lease payment estimate and see how affordable and flexible a good lease can be!

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Small Business Lease Guide

Find more tips on how to grow your business with leasing in our equipment leasing guide!

By Published On: July 23, 2021Categories: Equipment Leasing