Leases are a type of financing that generally involves equipment and vehicles. Leases are similar to debt in that they have an interest rate. The main difference is that over time, as the lease payments are made, the ownership of the equipment or vehicle does not transfer to the individual or company making the payments.
Read and understand the lease contract.
Find the market value of the equipment or vehicle being leased. Every lease is different, so the location of this number will vary, but it should be in the document somewhere. For the sake of this hypothetical example, we will assume the equipment is a large fuel tanker with a market value of £65,000.
Find the residual value of the tanker in the lease document. For illustrative purposes, assume the residual value of the tanker is £13,000.
Find the payment terms of the lease, for example, £1,170 per month for five years.
Subtract the residual value from the market value: £65,000-$20,000=£52,000.
Find the amortisation per month amount by dividing $80,000 by 60 months. This equals £866.
Subtract £866 from the total monthly payment of £1,170 to get a monthly interest expense number of £303.
Multiply £303 times 12 to get an annual interest expense number of £3,642.
Divide £3,642 by £52,000, the amount financed, to get 0.07, or a 7 per cent annual interest rate.