# Lease Rate

Put simply, the lease rate, sometimes referred to as a “rental rate” or “monthly rental rate” is your monthly obligation for usage of the vehicle. However, what most people don’t know are all of the components that ultimately go into calculating that figure.

Calculating a Closed-End Lease Rate:

There are basically 3 factors that make up the lease payment on a closed-end lease:

• Depreciation
• Finance Fee
• Taxes

To calculate the lease rate on a closed-end lease, you first need to determine how much the vehicle is anticipated to depreciate over the course of your lease term.

Example) Consider the lease of a \$30,000 vehicle on a 36 month/60,000 mile term. The lessor will utilize all of the data at their disposal to forecast what that vehicle will be worth at the end of that term. This is called the “residual value”. In our example, we’ll assume this to be \$14,000. Therefore, the depreciation of the vehicle over the lease term would be \$16,000 (\$30,000 starting price – \$14,000 residual value). If you take the total depreciation and divide it by the number of months in the terms, you’ll get your monthly depreciation amount (\$16,000/36months = \$444.44/mo). This is by far the largest portion of your payment.

The second component to your lease rate is the finance fee. This figure may be expressed as an interest rate or a “money factor”, depending on the lessor, but it is essentially calculating the cost of borrowing. This number may fluctuate depending on factors such as the current prime rate, the borrower’s credit, etc.

The final factor that completes the closed-end lease rate are the applicable taxes. This component will vary from state to state. Some states apply sales tax to each monthly payment, while others may require the entire amount due up front. Check with your state to determine exactly how that is handled in your area.

Calculating an Equity Lease Rate:

An equity lease is a completely different product than a closed-end lease, and thus the rate is calculated differently. In fact, an equity lease rate is calculated in a very similar way to a purchased vehicle.

As opposed to a closed-end lease, an equity lease does not have a fixed term or mileage limit. Instead, the vehicle is depreciated by a set amount each month (called a ‘depreciation reserve’) until a specified point in time.

Example) Assume a \$40,000 vehicle depreciated at 2% per month. Depreciating at this percentage will take the vehicle down to a depreciated book value of \$0 after 50 months (100% of book value/2% per month = 50 months). In this scenario, your monthly depreciation reserve would equal \$800/mo (\$40,000 x 2%).

However, like most finance arrangements, there is an interest component as well. This will need to be factored in and added to your depreciation reserve. Your fleet management company should be providing you with an amortization schedule so that you can see exactly how much of your payment is being applied to principal, and how much is being applied to interest during each month.

Finally, there will likely be some form of management fee included in the lease rate as well. This typically ranges anywhere from \$25 to \$45 per month.

Add all of those components together and you’ll have your open-end lease rate.