How Are Lease Prices Calculated?A quick guide to how lease prices are calculated
There are a lot of things that affect lease price. When you lease, there is not a ‘one size fits all’ in terms of pricing.
Each lease agreement calculates their lease prices differently, and it’s good to be aware of this before you decide which contract is right for you.
So, in this article we’re going to go through the different types of contract, and how the lease price is calculated for each of these.
How is business contract hire price calculated?
A price of a business contract hire is usually determined by the residual value, purchase price, term and annual mileage. This is how much the car will be worth at the end of the contract. The higher the value of the car at the end of the contract, the lower the monthly payments. This is because with a contract hire, you are only paying for how much the car will depreciate during your contract. Plus administration fee and any servicing agreements you may have.
The general sum for business contract hire is;
(purchase price – estimated residual value)/ months on contract + annual mileage + admin fee =
How is business contract purchase price calculated?
Business contract purchase is similar to contract hire. However, the main difference is what happens at the end of the contract. At the end of a contract purchase you have the options to hand the vehicle back, sell it, or buy the vehicle.
For that reason, the price is calculated a little differently. With a contract purchase the price is impacted by a number of factors. One of the biggest factors is what you do at the end of the contract.
At the start of your contract you will be set a balloon payment. This is also known as the Minimum Guaranteed Future Value and is how much your car is expected to be worth at the end of the contract. This payment is then deducted from the cost of the car. But then you add the expected depreciation. This total is divided by the number of months your contract is for and this total is how much you will be paying monthly (plus the interest for borrowing the money)
If you want to buy the car at the end of the contract, you will have to pay the minimum guaranteed future value.
How is the hire purchase price calculated?
A hire purchase is actually a finance agreement because at the end of a hire purchase you own the car.
At the beginning of a hire purchase you will agree to put down a deposit – this can be as much or as little as you want. You will also get the option of a balloon payment. This is a larger payment at the end of your contract that will clear off the remaining finance.
Your hire purchase price will be calculated by calculating the interest on the amount you are boring and then dividing the total by a number of payments The total of this will be the price of your monthly payments.
How is finance lease price calculated?
- Overall cost of the van
- Length of the contract
- End payment – the balloon payment
The balloon payment isn’t necessarily how much the car is going to be worth at the end of the contract. This is because, with finance lease, there are no mileage or condition restrictions. Instead, it’s a suggestion of a final rental payment.
This is set by you. And the balloon payment depends on how much you are putting down initially and how much you want to pay on a monthly basis. As we mentioned it’s extremely flexible, so we can’t give specific numbers.
What affects lease price?
While there are different calculations for each agreement, there are some universal factors that affect lease price. These include things such as;
- The type of car
- Length of contract
- Your annual mileage
- Choice of supplier
- Your credit rating
- The type of lease contract
- Residual value
- Manufacturer’s targets
- Any additional features
So all of these affect how much each contract is, regardless of how they are calculated. For more information on these you can read our article on what affects lease price here.
As you can see, different lease and finance agreements are calculated in different ways. However, there are some things, such as the factors mentioned above, that will affect pretty much every contract regardless of the contract.
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