36 month “Zero Percent Interest” lease, good or bad?

The 36 month “0 percent interest” lease is a product offered by leasing companies that is intended to appeal to customers who are sensitive about the interest percentage they pay in their lease agreements.  The term of these leases is almost always 36 months with a lease rate factor of .0278.  On a $10,000 sale price, the sales representatives show the lease payment of $278 X 36 months = a sum of lease payments in the amount of $10,000.  It is because the sum of the lease payments equals the cash purchase price that the 0% interest claim is made.

Is the “0% interest” misleading or is it the real deal?

Lets say you find a television you like at Best Buy that costs $1800.00.  The sales person tells you that they have a great “zero percent interest” program this television is eligible for.  Finance terms are 18 months with a payment of $100 per month.   After you make the 18 payments, you own the television.  That is a true “0% interest” transaction.

What if the Best Buy “0% interest” program did not automatically pass ownership to you after the 18th payment was received.  Instead, you have to either:

  • Return the television at your expense to any television return depot Best Buy requests.
  • Purchase the television for the Fair Market Value (20% to 40% of the television’s cost new).
  • Or let the contract renew for another year at a payment of $100.00 per month.

Would that feel like “0% interest” to you?  Well, those three options listed above are the only 3 options you would have if you signed up for a “0% copier lease.”

A lease rate factor for a 36 month lease of .0278 is a very good Fair Market Value rate. However, any claim of “0% interest” that is made is misleading.  The leasing company behind that rate is not loaning the money out at 0%.  Internally on a 36 month rate factor the interest rate charged is between 7% and 8%.  That is based on an internal residual being booked between 12% and 15% of the equipment cost and the first payment collected in advance.

The risk of entering a lease of this nature is the interest rate may not generate sufficient profit for the leasing company to cover their costs (cost of funds, billing, collecting, credit, administration, overhead, etc).  Thus, the leasing company may be more reliant on fee income generated from the lease to be used as a way to recover losses and earn a profit.  The fee income can be generated from late payment charges, insurance, and lease renewals.  The lease renewals can be as high as 12 months if the customer does not send in their written notice prior to the end of the lease.

If a client does enter into a lease of this nature, we highly recommend they invest in a contract management program such as  RenewAlert (www.renewalert.com).  They offer a reasonably priced web based contract and asset management system that will help protect you from leases renewing.

If you do find a lease proposal where the supplier is offering “0% interest” ask if you will own the equipment after you make the final payment.  If they say yes, make sure to get it in writing on the document.



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