You're getting good answers, but sometimes the third of fourth approach to answering the question helps. Not to imply that the previous answers are incorrect or incomplete.
1. "Lease Rate" is a convenience, given to you so that you can multiply your selling price by a number and end up with a payment acceptable to the lessor.
2. The "Short answer" from your leasing company is "We'll do that deal for 36 months at 0.0302".
3. The "Long answer" which they will seldom give you is:
- We believe that after 36 months, the value of the leased item to us (the lessor) will be 15% of its original selling price. So we are "taking a 15% residual position. I assume this is an FMV lease.
- We want to earn 12.88% on our leases.
- We have no need to communicate that information to our reps or our customers, so we'll come up with a rate factor. In this case, 0.0302 which will earn 12.88% if we assume a 15% residual.
Probably best Googling FMV and residual if this isn't clear, but basically...
On day one, the lessor will fund 100% of the funding to the dealer. The customer will make 36 payments of (.0302xfunding) to the lessor. At the end of 36 payments, if the equipment delievers 15% of its purchase price in value back to the lessor (and that value could be in the form of a buyout, or a new deal that otherwise would have gone to the competition, or wholesale value of the used machine), than the lessor earned 12.88%.
If the machine is of no value at lease end, the lessor only 5.5%. And obviously if the lessee doesn't make 36 timely payments and return the machine in agreed conditition, they can earn less than that.
With LIBOR spreads over 200, you can now see why it is difficult to secure leasing in the troubled SICs and Zips, since we are typically talking about light doc micro deals.
Sam Shallenberger
www.TheMacCFO.com
Twitter @TheMacCFO