A Lease Prices the Part You Use
Leasing charges for the value the asset loses during the term, plus a finance charge on the money tied up. The residual value — what the asset is worth at the end — is therefore the number that drives everything:
Payment covers (Value − Residual) + finance charge on the outstanding value
A high residual means less depreciation to fund, so a lower payment. This is why identical assets from different manufacturers lease at very different rates — the residual is set by the lessor's forecast, not by the price.
The Implied Rate Is Usually Hidden
Lease agreements rarely state an interest rate. Vehicle leases quote a money factor; equipment leases often quote only a monthly payment and a term. The rate is recoverable from the numbers, and this calculator does it — solving for the rate that makes the payment stream and the residual consistent with the asset value.
Comparing a lease against a loan without that figure is not possible, and lessors know it.
Operating and Capital Leases
An operating lease is a rental: the lessor keeps ownership and the residual risk. A capital or finance lease transfers most of the ownership risk and typically ends with a bargain purchase option; accounting treats it as a purchase with debt. Under ASC 842 and IFRS 16, nearly all leases over twelve months now appear on the balance sheet, which ended the practice of leasing to keep debt off the books.
Lease or Buy
| Leasing | Buying | |
|---|---|---|
| Up-front cash | Low | Down payment or full price |
| Monthly cost | Lower | Higher |
| Cost over ten years | Higher — payments never stop | Lower — the asset is eventually owned |
| Obsolescence risk | Lessor's | Yours |
| Maintenance | Often included | Yours |
Leasing suits assets that date quickly — computers, medical imaging, anything with a short technology cycle. Buying suits assets with long working lives and stable value.
Frequently Asked Questions
What is a $1 buyout lease?
A capital lease where ownership transfers for a nominal payment at the end. It is a purchase financed as a lease, and the payments are correspondingly higher than a true lease with a real residual.
Can I end a lease early?
Usually only by paying most of the remaining payments. Some agreements permit assignment to another party, which is generally far cheaper.
Is leasing tax-deductible?
Operating lease payments are typically a deductible business expense. A capital lease is treated as a purchase — you deduct depreciation and the interest portion instead. The distinction matters and is worth confirming with an accountant.