How to Calculate Annual Lease Payments

Most of the people sign agreements of lease for cars, building, computers and other properties without knowing how to calculate annual lease payments. A lease payment depends upon the amount of decrement which the property will suffer because of the renter’s use along with an interest cost to help the party which is leasing out the property.

Calculating annual lease payments is not a tough process. You can calculate it in these simple steps given here.

Steps for calculation

  • Find out the worth of the property which you are trying to get on lease. For example, suppose for a car the worth will be its MSRP.
  • Find out the interest rate on which the lease depends. The interest rate is given by the banker or the person to whom the property actually belongs. Then change the interest rate into a money factor by dividing it by 2,400. This factor is a common one used by leasing professionals.
  • Decide on what should be the lease term for the property. Generally property leases have a tendency to be within three to five years.
  • Find out what will be the probable residual percentage value of the property after the lease term. Residual value is like as the salvage value. It is that amount which the property will be worth when the lease period comes to its end. Generally lesser (the person to whom the property actually belongs) determines the residual value to be in between 50 % to 60 % of its original worth for a standard period of lease which is of three years. The longer the lease, the lower will be the residual value and the higher the probable residual value; the lesser will be the lease payment.
  • You should multiply the value of the property by the residual percentage to find out the residual value. For instance, if you assume that the $ 10,000 piece of property will be 55 % of its actual value after three years of the lease then the residual value will be $ 5,500. This means that you are supposing the lessee to use $ 4,500 value of the property.
  • You should divide the value of the property which will be used (here in the example, it is obtained as $ 4,500) by the numbers of monthly payments of the lease which will be made. If it is a case of a three year lease then you will have to make 36 payments. The monthly payment will be $ 125 (before interest).
  • Sum up the interest cost. If the agreed interest rate is 10 % annually then it means that the money factor is 0.00417 which is 10 % divided by 2,400. To obtain the total lease interest value, you should add the residual value that is $ 5,500 to the actual agreed value of the property that is $10,000 which will result in $ 15,500. After this, you should multiply the result with the money factor that is 0.00417.
  • The total monthly interest cost for this example obtained is $ 64.64.
  • Sum up the payment to cover decrement in the value of the property for $ 125 to the monthly interest price of $ 64.58 to obtain the total monthly payment of lease on the property that is $ 189.64.
  • You should multiply the total monthly payment of lease by 12 to compute the annual lease payment.
  • For this example, it will be $ 2,275.68.

Tips and warnings

For vehicle leases, the best estimation of the residual value will be based on mileage. The payment for lease formula does not take any taxes and other fees which can be made into your lease agreement into account.

Calculating lease payment is very important work, if you are planning to own a property on lease. I hope this article would have helped you in knowing how to calculate annual lease payments.Bottom of Form


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