Lease Rates/ Residuals Decoded

Back in the late 90’s we had some great lease rate factors.  .0275 for 36 months and .0193 for 60 months were not uncommon.  Digital was just coming out and while interest rates were not high, they were not that low either.  It was the residual positions taken by the equipment lessors that allowed these great rates.  The problem was, however, that with the new digital technology coming out, the analog market became essentially worthless.  Lessors who took a 15% residual in ’97 found those analog machines were essentially worthless on the wholesale market in 2000.

Why are residual positions so important to the leasing companies?  Consider a residual the last payment on a loan, a balloon payment of sorts.  When a lease is calculated, the lessee makes the stream of lease payments.  The residual is the anticipated value of the used asset once the sum of the lease payments is collected.  Take a car for example.  If you leased a $20K car for 36 months and that car had an $8,000 residual, the lease payments are based on capitalized cost minus the residual.  The residual of $8,000 would be based on 10,000 miles a year and what that car would go through the auction for.  If a lender needs to get a 9% interest rate on their money, the lease payment for 36 months (no money down) would be $441.60 per month.  In order to make a 9% interest rate, the lessee needs to pay 36 payments of $442 per month plus the car needs to wholesale for no less than $8000.  If it does, then the lessor earned a 9% rate on the lease.  BUT, if the lessee makes all 36 payments as agreed and the car only wholesaled for $6,000 what does that do to the lessor’s interest rate?  That takes it to 5.13%.  Most lenders have that as their cost of funds, then they need to add on for bad debt, cost to bill and collect the funds, management, admin, sales, and of course profits.

If a lessor misses on a residual position, it can be devistating for that portfolio.  The lease rates in the late 90’s were built on artificially high residual positions which with the introduction of the digital product, devistated the leasing industry.  Today’s lease rates are even lower than what we saw in the late 90’s.  However these factors are based on lower costs of funds and not higher residuals.  You can lower a lease rate factor by doing 2 things; lower your interest rate or raise your residual.  This time around its lowered rates.  What does this mean for the future of the industry?  While residual realization should be ok, lessors will make very little in terms of their spread.  They will be counting on fee income for their profits.  Fee income includes late fees, property tax fees, insurance, renewals, and early termination fees.

Offsite (www.offsiteequipment.com)  has a national network of secure warehouses to store competitive leased copiers that cannot be returned to the leasing company early.  Offsite can pick up your customer’s copier, store it, remind the customer to send in their Letter of Intent, and manage the return shipping all for one low price.  We have an easy to use price sheet so our referring dealers can easily build the cost into their customer’s buyout check.  Offsite uses a state of the art internet based project management system to track all files and can even grant view access to our referring dealers and their customers.  Offsite has excellent lease return shipping pricing and we can also move equipment for customers without requiring advance payment or a credit application.  Visit our website today at www.offsiteequipment.com .  At Offsite, we know logistics and we know copier leasing, our services are second to none.

Welcome to the new world of office equipment leasing.

One comment

  1. Makes sense. One then could argue, it is because of residual positions that equipment leasing companies are the way they are today. If we just sold dollar out, we would not have the leasing companies controlling our upgrades like they do today.

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