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Estimate monthly lease payments for equipment or vehicle leasing. See the depreciation and interest components that make up each payment.
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How are lease payments calculated?
Lease payments consist of two components: depreciation (the drop in asset value over the term) and an interest charge on the outstanding balance. The present value of the residual is subtracted from the asset value to determine the net amount being financed.
The formula is:
Net Financed = Asset Value - PV of Residual
Monthly Payment = Net Financed — r / [1 - (1 + r)-n]
Where r = monthly implicit rate (annual rate — 12), n = number of months. The depreciation component is (Asset Value - Residual) / n, and the interest component is the difference between the total payment and depreciation.
Assumptions and caveats
- •A fixed implicit rate is assumed for the entire lease term.
- •Residual value is an estimate. Actual residual depends on asset condition, market conditions, and guarantor arrangements.
- •Maintenance, insurance, and servicing costs are not included.
- •VAT treatment varies depending on lease type and business VAT status.
- •Results are indicative estimates only. Contact a provider for a formal quotation.
Frequently asked questions
An operating lease is a rental agreement where you use an asset for a fixed period without taking ownership. At the end of the lease, the asset is returned to the leasing company. Operating lease payments are typically treated as an operating expense.
Residual value is the estimated worth of the asset at the end of the lease term. A higher residual value reduces monthly payments because you are only financing the depreciation between the asset's current value and its residual value.
With a lease, you never own the asset — you return it at the end of the term. With hire purchase, you take ownership after making all payments. Leases often have lower monthly costs but no asset to keep at the end.
Operating lease payments are generally fully deductible as a business expense against corporation tax. However, tax treatment can vary depending on the lease structure and accounting standards. Consult your accountant for specific advice.
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