Friday, December 18, 2009
Leasing Copiers "Who Stole the Cheese!"
Sniff and Scurry, two of my favorite mice.
While going through my emails the other day, I had an email from a client in the South. The email was in reference to "what is really the interest rate for a Fair Market Value lease for a copier."
The email stated that for the life of them they could not figure out the interest rate and was asking for help and advice. Well, asking me to figure out the interest rate is like asking me to get my dog to stop sniffing every pole or fire hydrate he passes. Not going to happen!
What I did enlighten them on is how copier companies figure out the monthly lease payment.
First, there has to be a rate factor that the salesperson gets from either the leasing company or the copier companies management. There are many different rates from many leasing companies and the rate factors change with the term of the lease (12,24,36,39,48,60,63 months), also the dollar amount of the lease would also change the rate factor along with the option at the end of the term (buy out).
There are primarily two different types of leases used:
Fair Market Value: Leasing company gives you the option to purchase for a percentage of the purchase price. This type of lease has the least amount of interest. True lease, tax deductible and write off every month
Dollar Out: You own the equipment at the end of the term for one dollar. This lease will have a higher interest rate than Fair Market Value. This is a finance lease and may not be depreciated like a true Fair Market Value Lease.
What's more popular?
The Fair Market Value lease, basically has four options at the end of the term. A) Ship back to leasing company at your expense at the end of the terms. B) Renew the payments at the end of term for 30 days, 90 days, or longer, check the lease that was signed. C) Trade the equipment back to the dealer and start a new lease, the dealer will then return the system for you. D)Buy the equipment from the leasing company for Fair Market Value.
How was the Cheese Stolen?
So, who is stealing the cheese? Well in this particular email, the customer wanted to find out the interest rate, which I couldn't help with, however I asked them to send me a copy of the quotes and I would tell them how much interest they were paying over the term of the lease. The next day I received five quotes.
For you newbie’s out there, as long as you have the monthly lease amount you can figure out the lease purchase price of the system or at least come close. You take the monthly dollar amount of the system and divide by the rate factor. In this case the customer was quoted $762 per month for a 60 month lease. They were also quoted a purchase price of $26,375 and they had a buyout of $9,142. This made the lease base according to the Direct Branch $35,517.
Now using an average rate factor of .0200 we take the lease price of $762 per month and divide by .0200 which equals $38,100 that would be funded to the Direct Branch for the system that had a purchase price with buyout of $35,517. Well...., we can see that someone has "stolen the cheese". If you now take the purchase price with buyout that was quoted at $35,517 and multiply it by the fair (60 month) rate factor of .0200 (fair for over $20k), the customers payments should have been $710.34. Hence the customer is getting ripped for $52 per month on a 60 month lease, thus paying an additional $3,120 over the term of the lease.
What's a rate factor?
Rate factors are given from the leasing company to the dealer or direct branch. A rate factor of .0200 means that the cost to borrow is $20.00 per thousand dollars. Thus if you wanted to prove the above numbers you would multiply $20.00 x 35.517 which would equal the payment of $710.34.
This was not a cost per copy lease, nor was service and supplies built into the lease, it's basically a game that has been played in the industry for years. Not only are they making money on the hardware but also "padding" the lease for additional profit!
To be fair, there are many different rate factors from different leasing companies, in this example I used an average rate factor. There are lower rates and higher rates that could either increase or decrease the amount to the dealer or direct branch. Most dealers and direct branches are in the average that I quoted.
Don't Blame the Salesperson
Don't blame the salesperson, most of the time the salesperson is not even aware of the average rates, there is a finance department at the dealer or direct branch that "pad" the rates to the sales person and or dictate that they HAVE to use these rates or ELSE! The salesperson is not getting the extra dollars for the unit.
In the instance above, the salesperson probably quoted the right purchase price, however they had to use a "padded rate" which increased the lease price per month. The branch received the additional profit from the lease.
Word to the wise, always when leasing ask for a purchase price for the equipment or the total amount of the order. Do some homework; ask what rate factor they are using and how they arrived at the price per month for the lease. If you think you're paying too much, you probably are.
How can you find fair rate factors? Well, that's probably the hardest part of the equation. You can always send me an email and I can give you the average for any dollar amount or term. Then you can do the math!
Oh, by the way, there are many dealers and branches that pass along rates without padding the rates, I think there are more of these than those who pad. I also think that this "padding" is much more common with direct operations than dealers. Just my thoughts!!