Why Purchase?
In a vehicle purchase, the customer makes a down payment on the
cost, and pays the balance in monthly payments over the term of the
loan.
The monthly payment will include a principal payment (which
reduces the amount owed) and an interest payment. Normally, only the
interest payment is deductible as a business expense.
The depreciation of the vehicle over its lifetime is normally tracked as a separate expense for tax purposes.
After paying off the purchase loan, the customer owns the vehicle outright, and may continue to use it or sell it.
Why Lease?
A lease is a financing method in which the customer only pays for a
portion of a vehicle's cost. That portion is paid in monthly payments
over the term of the lease.
The portion of the vehicle’s cost that is not paid by the customer is called the residual value.
The relationship between the price of the vehicle and its residual
value at the end of the lease term is important in leasing, because it
determines how much the customer will pay.
What’s the first thing I should know about purchasing a new commercial vehicle?
In a vehicle purchase, the customer makes a down payment on the
cost, and pays the balance in monthly payments over the term of the
loan.
In the financing industry, the acronym “MAST” is used to describe
the business factors that influence the type of financing used:
- Mileage,
- Application,
- Specifications,
- And Terms of Service.
What should these factors influence my decision to purchase or lease a vehicle?
- Mileage
The number of miles anticipated for the vehicle’s service life
affects the financing decision, particularly with leases.
- Application
The specific use of the vehicle may be very important in the
financing decision. Vehicles that are subject to a great deal of wear
and tear may need special purchase or lease arrangements.
- Specifications
The exact vehicle configuration, including accessories and unfitting will influence the financing decision.
- Terms
The length of time the vehicle is expected to be in service is also important to financing.
What factors should I consider when purchasing a vehicle?
- Monthly Payment
Monthly payment will include a principal payment and an interest payment.
- Depreciation
Depreciation of the vehicle tracked as a separate expense for tax purposes.
- Payoff
Customer owns the vehicle outright, and may continue to use it or sell it.
How is the cost of a lease calculated?
Start with the negotiated selling price of the vehicle, also
called the capitalized cost. From that number, subtract the residual
value. This equals the lease amount. Multiply the lease amount by the
lease factor to get the total lease cost.
What is a “lease factor”?
The “Lease Factor” determines how much the customer will pay in
lease charges over the life of a lease. It is similar to the interest
rate charged on a purchase loan.
What is the “lease term”?
The period of time for which a lease agreement is written is
called the Lease Term. Business customers typically have several options
available at the end of their lease terms.
What are the options at lease termination?
End of Term Options:
- Purchase vehicle for residual amount specified in lease agreement
- Extend lease by financial residual value
- Turn in the vehicle
What factors affect how the lease residual is calculated?
The residual value depends on several factors, including the…
- Expected average annual mileage
- Expected use
- Number of months in the lease
- Make, or model vehicle, and…
- Resale history of similar make vehicles.
