What Are Lease Payments?
Let me explain what lease payments really are. They're like your monthly rent, but formalized in a contract between two parties. This contract gives you, the lessee, the legal right to use someone else's real estate, manufacturing equipment, computers, software, or other fixed assets for a set period. In exchange, you make payments to the lessor, getting limited use rights without any ownership transfer.
The duration for these payments can vary widely. You might have a month-to-month setup, common in software-as-a-service (SaaS) models, or something much longer, like 100 years or more, which you often see in land leases.
Key Takeaways
- Lease payments are regular, often monthly, fees for the right to use a property, asset, or piece of equipment.
- You can enter lease agreements for land, cars, computer equipment, software, or other fixed assets.
- The terms and payment schedule are usually detailed in a legal contract.
- Lease timetables can be short, like month-to-month, or long, such as in land leases that last a century or more.
Understanding Lease Payments
Both individuals and companies make lease payments. As an individual, you might use leases to finance a car, or to get access to computer equipment, land, or other physical assets. The amount you pay depends on several factors: the asset's value, local residual values in your area, discount rates, and your credit score.
For companies, these payments play into the fixed-charge coverage ratio. This ratio helps investors see if a company can cover its fixed expenses, like leases and interest. It's basically an expanded version of the times interest earned ratio, and it's flexible because it includes nearly all fixed costs, which are similar to lease payments.
Common Types of Leases
You should know the most common types of lease agreements: operating leases, financial leases (also known as capital leases), sale-and-leaseback arrangements, and combination leases that blend two or more of these.
What stands out about an operating lease is that it covers both financing and maintenance. Your payments include financing charges plus maintenance components, and the lessor has to service the equipment regularly. Take aircraft owners leasing out jet engines, for example—it's common because owners often lack the expertise to maintain these specialized parts themselves, so they bundle maintenance into the lease payments.
Financial leases are different; they don't include maintenance fees in the payments. There are also newer types, like synthetic leases or those based on mileage, hours, or usage. For instance, General Electric leases locomotive components with payments tied to mileage, so you're only paying for what you actually use.
Important Note for Consumers
If you're considering leasing a car instead of buying, watch out—some dealers set mileage minimums to protect the vehicle's resale value.
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