What is a Lease & How Does it
Work?
VENDING MACHINES & CON OPERATED EQUIPMENT LEASES.
Hanna is pleased to help you with your vending machine leasing
education and also regarding
�leases� in general.
Technically, a lease is a legal agreement between two parties
that specifies the terms
and conditions for the rental of property, which, in this case
is a car. In general, the agreement is not between you and the
vending machine or car dealer, rather it is between you and a
leasing company chosen by the dealer. In other words, the
vending machine
or car is actually sold to the leasing company who, in turn,
rents the vending machine or
car to you.
The dealer simply acts as an agent for the leasing company and
helps to negotiate the terms under which you will rent the
vending machine or car from the leasing company. The following
educational format is being presented to give you a general idea
of how a lease works. Regardless of what kind of equipment or
vehicle you are buying, these are important details for you to
be familiar with.
To better help you understand about leases in general, we
have used car leases as an extensive example since you are most
likely to also need an education on car leases in case you
should have that need at a later date.
VENDOR BENEFITS & LESSEE BENEFITS OF
LEASING:
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Fast and Flexible Credit Decisions
At Hanna, we understand that time is money. We strive
to communicate a decision to you within hours or usually within
one full business day. |
Vending Master Lease
We are able to get you all the equipment you need from one
master supplier (The Hanna Group) with one lease document. You
select the equipment you desire and we make the arrangements to
handle the lease plan for you. |
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"Add-On" Flexibility
If you
find the need for additional equipment, Hanna will arrange for you
to add to your existing lease agreement at any time.
Approvals of New Vending & Coin Operated Equipment Businesses
Our competitors look at them. We work to get them approved.
Seasonal Vending Lease
Payment Plans
Hanna will help make arrangements for you to coordinate
payment due dates with seasonal cash flow.
"Easy Lease" Vending Program
No Postage - No Late Charges - No Hassles! Forget about coupon books
and writing checks. Monthly lease payments can be directly debited
from a designated bank account on the agreed upon due date if you
desire.
Simple One Page Vending Lease
Application
We realize how cumbersome it is to complete paperwork. Please refer
to our "Financing" tab to download and print our standard credit
application. If you prefer, we can fax an application or e-mail it
to you. In cases where additional information is required (such as
new business ventures or larger transactions).
No restrictions on NEW or USED Vending
Equipment
We can arrange one or the other or a combination of both.
Competitive Terms
Hanna will arrange the most competitive terms in the industry.
Less Documentation and Lower Initial Out
of Pocket Expense
We are able to complete your equipment lease with less documentation
and up front expense than a bank requires. Additionally, we do not
require "compensating balances" required by most banks.
Dedicated and Knowledgeable Vending and
Leasing Support
Hanna�s team of leasing and financing specialists are dedicated to
providing the highest level of customer service.
General advantages of leasing your
vending equipment
Leasing Keeps Cash In Your Hands
You can obtain profit making �new or
used� vending equipment immediately without touching your cash
reserve.
Leasing Preserves Your Established Credit Lines. Leasing extends the
range of your credit facilities. Leasing Facilitates Budgeting and
Hedges Against Inflation.
The monthly rental of leased equipment is a fixed cost and can
help you plan your priorities in your expansion or new business
program. Many businesses have found that fixed monthly payments for
leased equipment can fit into the tightest of budgets.
Leasing Vending Equipment May Offer Tax
Advantages and Convenience
Lease payments may be 100% tax deductible as a business expense.
(Please consult your tax advisor for individual tax advice)
Leased Vending Equipment Pays Its Own
Way
Would you pay your employees four years in advance? That is what you
are effectively doing when you purchase equipment. When you lease,
you pay for the use of the equipment as it contributes to your
profit.
Lease Terms
The lease terms are more directed at Car leases. We wanted you to
get a better idea about leases in general:
� The Capitalized Cost: The amount the car
is sold to the leasing company
(less cap reduction payment)
� The Money Factor: Analogous to the interest rate on a loan.
� The Residual Value:
The projected value of the vehicle at the end of the lease.
� The number of months: length of the lease.
� Monthly Payment: How much you pay each month.
In practice, the money factor and residual value are difficult to
negotiate. However, just as in conventional financing where the
sales price of the car is negotiable, the capitalized cost is
negotiable and the lower the cap cost, the lower your payment.
Types of Leases
Vending & other types of leasing, including car leases and how they
work!
There are two types of automotive leases available today, the
"closed-end lease" and the "open-end lease".
Closed-End Lease
(Most popular in vending machine leases): In the closed-end lease
the residual value of the car at the end of the lease is
pre-determined before the lease is signed. At the end of the lease
period, you have the option to purchase the car for this price (plus
a nominal administrative fee) or, the vehicle may simply be turned
in to the dealer and you walk away. This is also the most popular
type of lease today in vending. Leases can be negotiated to end with
a $1 buy out or a set percentage buyout in the amount of 10% or 20%
(or some other mutually agreed amount) of the original total value
of the equipment to be leased.
Open-Ended Lease
(Not popular in vending equipment transactions): The open-ended
lease works the same way as the closed-end lease except that the
residual value of the car is estimated at the start of the lease.
When the lease expires, the estimate is compared to the actual
market value of the car, and, you guessed it, you pay the difference
which can be substantial. This type of lease is seldom used today
for non-commercial leases while most consumers find closed-end
leases best meet their needs.
Terms and Definitions
Below are definitions to terms that are the language of leasing
which you should understand if you are to successfully negotiate a
fair deal. Therefore, it is highly recommended that you take a few
minutes to become familiar with this list.
MSRP
Manufacturer's Suggested Retail Price (List/Sticker Price). This
value is used to calculate the Residual Value of the car.
Residual Value
This figure represents the estimated value of the car at the end of
the lease. In a closed-end lease, you will have the option to
purchase the car at the end of the lease from the leasing company
for the residual value. The residual value, which is used to
calculate the monthly payment, accounts for the car's depreciation
over the lease period. In general, the lower the residual the higher
your payment. Sometimes the residual is expressed as a percentage of
the retail price (MSRP) of the car. Typical residuals range from 35%
to 65%.
Note: The residual will vary widely depending on the length of the
lease (number of months) and the type of car.
Money Factor
A decimal number that is used to calculate the lease payment. This
number may be converted to an approximate interest rate by
multiplying by 24. Example: A money factor of 0.00495 converts to an
interest rate of about 11.9%.
Note: Different model cars or vending
machines for that matter, from the same supplier may have different
money factors. Also, the lease rate or factor will vary slightly
with the length of the lease (number of months). The credit strength
of the buyer will also determine the exact factor that will be used.
Effective Annual Rate / Lease Rate
The annual percentage rate (APR) for the lease. This rate is
approximately equal to the money factor multiplied by 24.
Cap Cost
Or Capitalized Cost is analogous to the purchase price of the car on
a conventional car loan. The cap cost is the price at which the
dealer sells the car to the leasing company and is negotiated
between you and the car dealer. This number includes the dealer's
cost on the car plus a margin and is also used to calculate the
monthly payment.
Invoice Price
This is the invoice that is presented.
Cap Reduction
A Capital Reduction (Cap Reduction for short) payment is cash paid
by you at the signing of the lease that is applied towards the
capitalized cost of the car. In other words, a cap reduction payment
reduces the price at which the car is sold to the leasing company
and thereby reduces the monthly payment. If you are trading in a
vehicle, the allowance for your trade is usually applied as a cap
reduction. The fine print in "teaser" ads with very low payments on
expensive cars often will require cap reduction payments of one to
two thousand dollars.
Excess Mileage Fee (May not
apply to Vending)
This is a flat fee that the consumer pays at the conclusion of the
lease. The fee is usually expressed as number of cents per mile in
excess of a specified number of miles driven in one year. For
example, if the fee is $0.15 for every mile over 15,000 miles per
year, and the mileage on the car at the end of a three year lease is
48,000 miles, the excess mileage fee would be $450. Some leasing
experts maintain that this fee is negotiable.
Acquisition Fee / Lease Inception Fee /
Origination Fee
This fee, which is typically $100 to $300 may be assessed.
Sometimes, these fees may be waived or absorbed by the seller.
Disposition Fee
This fee, which can be up to several hundred dollars, is paid at the
end of the lease period if you do not exercise your option to
purchase the car..
Early Termination Fee
If for some reason you are compelled to break the lease, you will
almost certainly be obligated to pay this fee. Depending on the
wording of the lease agreement, this fee could be very substantial.
Therefore, you should be sure to understand the terms under which
the lease may be broken before you sign the contract.
Pro's and Con's of Leasing
Is Leasing Right for Me?
As with anything in life, there is a long list of pros and cons with
both vending machines and coin operated equipment leasing and also
with automotive leasing that should be fully understood and
carefully considered before you sign on the dotted line. Here are a
few of the most important ones.
Advantages of Leasing
Lower Payments
With a lease your monthly payments will almost always be lower than
a conventional loan because you are paying for only a portion of the
car's full value over the lease period. This gives you the option of
driving a nicer car for the same monthly cost.
Dealer Incentives
In tough times master dealers like Hanna may offer very attractive
terms such as below market interest rates and artificially high
residuals that both have the effect of lowering the monthly payment.
Lower Up-front Costs
Unless you decide to make a large cap reduction payment, initial
costs for most leases will be limited to a refundable security
deposit (typically one monthly payment rounded up to the nearest
$25), sales tax depending on your state, title and registration
fees, environmental fees (i.e., battery and tire disposal fees), and
finally, your first monthly payment. As a result, leasing ties up
less of your capital, freeing cash up for more lucrative
investments.
Federal Taxes
With the tax reform act of 1989 phasing out deductions for interest
on car loans, leasing may now compare more favorably against
conventional financing from a tax standpoint. Although most
individuals will not save taxes with a lease, some businesses may
enjoy certain advantages with leasing. Consult your tax advisor for
more information.
Sales Tax
Most states tax leases by taxing the monthly payment stream and any
cash down payment (cap reduction). This works out to quite a bit
less than paying sales tax on the full price of the vehicle as
required in a purchase.
Hassle-free Disposition
At the end of the lease you simply turn the car back in to the
dealer and walk away. You won't have the effort and expense of
selling the car or haggling over its trade-in value. If you decide
to buy the car at the end of the lease you know about how much it
will cost (no more than the residual value).
Disadvantages of Leasing
Early Termination
The terms for early termination of most leases can be very
unpleasant for the consumer, particularly if the termination is
forced, i.e., the car is totaled in an accident or stolen. In such
cases, insurance pay-outs often fall far short of the balance due on
the lease leaving you holding the bag. Many leasing companies will
offer "gap insurance" for only a few dollars a month extra which is
a wise investment.
There is a very good reason why it is so expensive to get out of a
lease. Consider that your monthly payment is made up of two parts:
depreciation and interest. The depreciation part of the payment is
calculated by taking the difference between the cap cost and the
residual (the total depreciation over the lease) and dividing it by
the number of months. In effect, you are paying off the depreciation
with equal payments each month. Graphically, the depreciation is
being paid "in a straight line".
But we all know that a car depreciates much more
rapidly in the earlier years with the biggest hit occurring the day
you drive the car off the lot. So when you terminate the lease
before you have paid all of the depreciation, you will likely be
required to pay the difference between what the car is worth and how
much you have paid on the depreciation. This difference is often
referred to as the "gap".
Some lease contracts will really stack the deck against you with the
terms for early termination. For example, some Nissan Motors leases
require the sum of all remaining payments be made before they will
release you from the lease. Other leasing companies tack on an
additional early termination fee of $250 to $450 in addition to
unpaid depreciation. Always read the fine print of the lease
contract and understand your exact liabilities for early termination
before you sign.
Insurance Cost
Leasing companies tend to require higher amounts of insurance
coverage than you may normally carry. This could impact your
insurance cost considerably. Find out what the requirements are and
get an estimate from your insurance company before signing on the
dotted line.
Higher Credit Requirements
Since the expensive car you will be driving for the next 2-5 years
belongs to someone else (the leasing company), the owners want to be
assured that you will make the payments on time and will not trash
their car. Therefore, the credit worthiness standards tend to be
higher for leases than conventional loans. In other words, if you
have a troubled credit history you may have problems getting
approved for a lease.
Mileage Limitations
Almost all leases limit the number of miles per year by imposing
fees typically 10 to 15 cents per mile over 15,000 miles per year.
If you put a lot of miles on a car, these fees can add up quickly.
This does not apply to vending equipment leases.
No Ownership
Technically, when you lease a car, you are renting it. The leasing
company retains ownership of the car and you pay for the privilege
of driving (and maintaining) it. For many who have "owned" cars all
their lives, this may be a psychological barrier.
Crunching Numbers
Calculating Lease Payments
Calculating the monthly payment on a lease is not rocket science
especially once you've been shown how to do it. Yet, the ability to
calculate the payment yourself is the single most import tool you
have to fight leasing fraud. This page explains how to do it with
example calculations.
Ford Leases
Ford lease payments are calculated a little differently than all the
other leasing companies. Unfortunately for Ford customers, this
method ends up costing more due to a built-in, undisclosed fee.
GMAC Leases
GMAC lease payments tend to come out slightly higher than a payment
calculated using the constant yield method with the same interest
rate. Our sources indicate that GMAC is "discounting" the residual
before calculating the payment. We will post more information on
this method in the near future.
Sales Tax on Leases
Most states simply tax the monthly payment stream and any cap
reduction payments paid in cash. There are a few exceptions such as
New York, New Jersey, and Illinois.
Calculating the Monthly Payment
No discussion about leasing would be complete without an explanation
on how the monthly payment is calculated. Once you understand the
terms and their meaning, calculating a lease payment is relatively
simple.
Constant Yield Method
This method is used by most major leasing companies with the
possible exception of Ford Motor Credit (see below). To calculate
the monthly payment using the constant yield method, use the steps
below:
STEP 1: Determine the
Adjusted Cap Cost:
STEP 2. Determine the monthly
depreciation:
Monthly
Depreciation = (Adjusted Cap Cost - Residual)/Number
of
Months
STEP 3. Determine the monthly finance
charge (sometimes called the lease
charge):
Monthly
Finance Charge = (Adjusted Cap Cost + Residual) x Factor
STEP 4. Add the monthly depreciation to
the monthly finance charge to obtain
the
monthly payment before taxes.
Monthly Payment = Monthly
Depreciation + Monthly Finance Charge
If you live in a state that taxes only the payment, you can
calculate the payment with sales tax. Simply multiply the payment by
1 plus the sales tax rate (e.g., 1.06 for a state with a 6% tax
rate).
The plus sign in the formula in step 3 for the monthly finance
charge is not a typo. The finance charge is based on the sum of the
cap cost and the residual, not the difference. People are used to
hearing that in a lease you only "pay for only the part you use" and
hence should only pay interest on the depreciation (difference
between cap cost and residual). This is not the case at all.
Instead, the best way to think of a lease is like a balloon loan
where the principle is the cap cost and the balloon payment is the
residual value which is made by turning in the car.
Expert Lease Pro Software
Often you know all the terms of the lease except one. With the above
equation one can solve for any one unknown variable. But the math
can get a little messy for some folks. If this is the case, check
out Expert Lease Pro software published by Chart Software. Not only
will this excellent program help you with the math, but it comes
with a war chest of tools and data to help you negotiate the
sharpest deal and to help you make the right lease/buy decision.
Calculating Ford Lease
Payments
Ford APR Method
The interest rate quoted by Ford dealers will not represent the true
APR of the lease. This is because Ford adds an administrative fee of
approximately 0.00111 times the cap cost to each monthly payment.
This makes the monthly payments fell about 1.5% higher than the rate
quoted by the Ford dealer. Consider the sample Ford lease below:
Cap Cost = $21,400
Residual = $16,683
Months = 24
Interest Rate Quoted by Dealer: 9.0%
The Ford Payment would be the monthly payment at 9%
using the constant yield method plus 0.00111 times the cap cost, or
$338.08 + $21,400 (.00111) = $361.84
The equivalent APR for this monthly payment stream is 10.5%.
This hidden fee can add up to a significant amount of money,
particularly on more expense vehicles. For example, the fee on a
vehicle with a $25,000 cap cost is $27.75 per month times say 36
months. This adds up to a whopping $999.00!
Investigations and Lawsuits
In November of last year, Florida's Attorney General announced that
Ford Motor Credit and it's dealers are the target of a 22-state
investigation looking into Ford's allegedly deceptive practices
under it's Red Carpet leasing program. The AG's are investigating
such practices as pay packing, failing to properly credit trade-in's
and cash payments, secret price increases, and misrepresenting the
cost of lease transactions.
Class action suits against Ford Motor Credit have
now been filed in over 30 states. The lawsuits allege deceptive
lease practices and fraud.
For the above reasons, our humble opinion is that until things
change, you do not consider leasing from Ford dealers through Ford
Motor Credit.
Sales Tax on Leases
Most states tax automotive leases by charging sales tax on the
monthly payment and any cap reductions paid in cash.
Example:
Gross Cap Cost: $25,000
Cap Reduction paid in cash: $2,000
Net Cap Cost: $23,000
Residual: $14,820
Monthly Payment at 8.0% for 36 mos: $352.78
6% Sales Tax on Monthly Payment: $352.78 x .06 = $21.17
Total Payment with Tax: $352.78 + $21.17 = $373.95
In addition to the tax on the monthly payment, you must pay tax on
the $2,000 cash cap reduction payment at signing:
$2,000 x .06 = $120.
Total Tax Paid:
$21.17 each month for 36 months = $762.12
Plus $120 tax on cash cap reduction
Total Tax: $882.12
Taxing the payment stream on a lease results in
significantly less tax than if you were to purchase the same
vehicle. In the above example, the tax on a purchase would be:
$25,000 x .06 = $1500 or 70% more tax than the lease.
Note: States that tax the monthly payment stream generally exclude
the value of any trade-in from sales tax.
Not all states tax leases this way (be sure to check with a local
tax collector's office to find out how your state taxes automotive
leases). Below are the exceptions.
Illinois
Illinois taxes the full purchase price of the lease as though you
purchased the car. The full amount of the tax is due at signing.
New York
New York taxes the sum of the lease payments plus any fees paid in
cash. Security Deposit, registration and title fees are exempt
though.
New Jersey
New Jersey taxes the sum of the payments less finance charges. This
is another way of saying they tax the vehicle's depreciation over
the period of the lease.
CONCLUSION
We hope that you appreciated the above education on leases and how
they work. We are always investigating better ways to serve our
Hanna vending customers. If you have any suggestions or if you would
like to contribute additional information, please call
Charles Hanna at 913 894 4979.
Click here
for the Hanna Leasing Application - Word Format
or Download a .pdf version of the
Leasing
Application
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