In our ongoing series of getting into the details of equipment leasing agreements, I thought I’d start out with the basics: explaining and defining several notable equipment leasing terms. I’m going to stick to just a few essential terms that are important – you will find these all throughout any lease agreement, especially in the fine print.
Lease Term – This is the total time of your lease. It is usually broken down into months, but can also be calculated as years for ease of discussion (e.g., a 36-month lease and a three-year lease are the same thing).
The Lease Term will affect your monthly payment in the same way a finance term does – the longer the term, the lower the payment. But the lease term will also affect the ending residual value, which we’ll get to in a second…
Monthly Rent – Can you guess what this is? It’s your monthly payment. It’s sometimes called monthly rent because leasing is often seen as closer to renting equipment than buying it. There, that was simple!
Residual Value – This is the value of the equipment at the end of the lease term. This can either be a calculated value at the beginning of most leases (“assuming normal wear and tear, the equipment will be worth $XX at the end of three years”), or a value determined by the market (in a Fair Market Value lease, the residual value at lease end is, you guessed it, the fair market value.)
In the case of the residual value being determined at lease inception, it will affect the monthly payment – essentially, you’re paying for the portion of the item’s full value you are using during your lease term. So the higher the residual value (percentage-wise) to the equipment’s overall value will result in a lower payment (this is also determined by lease term – all things equal, a two year old vehicle is worth more than a same model three year old one).
The residual value is typically the price you can buy the equipment at after the lease is over (or use as the item’s value in a new lease.)
Lease Rate – Similar to an equipment finance agreement, this is the rate you pay on your lease term. It’s calculated a little differently (instead of straight interest, it’s more a flat fee divided by the term, but it generally works out to similar amounts.)
Lessee / Lessor – I debated putting these here because they seem a little basic. But you know what? Even I get them confused sometimes. The Lessee is you, the person or company leasing the equipment. The Lessor is the one providing the lease, in this case, Crest Capital.
The preceding are the basic terms you’ll run into with any lease agreement, and should get you by in understanding everything pretty well.