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A lease is a usual contract that is made between a lessor (who is the legal owner of the asset) and a lessee (who is the person who wants to use the asset) for the use of an asset over a period of time. This is bound by certain rules that are intended to protect the interest of both the parties to the contract.
In a typical contractual agreement of this type, the lessee simply has to obtain the right to use an asset or multiple assets whatever maybe the case, belonging to the lessor for a specific term in return for regular rental payments.
How is Lease Calculated?
Leasing is very often associated with categories like living spaces, working spaces and cars, but mostly anything that can be owned can be leased. Other examples of leasable items are storage, conveyor belts, lighting, furnishings, aircraft, software, server hardware, cleaning equipment, and many more.
The formula used is:
Step 1: First calculate the Monthly Depreciation Charge (CC – RV) / M
Step 2: Then compute the Monthly Finance Charge (CC + RV) * MF
Step 3: Finally, find out the Total Monthly Charge (plus tax) (Monthly Depreciation Charge + Monthly Finance Charge) * LST
Here,
MF stands for the Money Factor (You can find out what your interest rate is by multiplying the money factor by 2400).
RV is the Residual Value (also called the salvage or scrap value) that is what the car is worth at the end of lease period.
CC is the Capitalized Cost aka Sale Price.
LST is Local Sales Tax.
M is the Term of the lease (say 24,36,48 years).
The property covered in a lease is usually either a real estate or equipment type such as an automobile or machinery.
There are two kinds of leases mostly. A capital lease is long-term lease where ownership of the asset transfers to the lessee at the end of the lease period. An operating lease, on the contrary, is a short-term lease where the lessor retains all rights of ownership at all times.
Using the leasing calculator, it is very simple to compute the figures:
1. Firstly, you will need to determine the product value (that is the value of the transaction) of an asset you want to lease out. In addition to this, you can substantiate the value of your down payment in the form of a fixed amount or as a means of percentage form of the actual product value.
2. Secondly, you need to try and evaluate the residual value (which is an appraisal of how much the good is going to be worth at the end of the lease tenure) of the asset you want to lease. You can do this in two ways- either in the form of a fixed value or as a percentage of the initial product value.
3. Next, you will be required to provide the interest rate on which all calculations will be based upon.
4. Lastly, you should put in the lease term in either years and months (depending on the nature of the lease).
The lease payment calculator will estimate your monthly payments. In the advanced mode, it will also calculate the total payment on the lease, the total interest to be paid and the total cost to own the leased property.