Trusted or Loved?
Understanding The Pitfalls in Equipment Leasing
Written By: Robb Stevens
Years ago, when I was working in a different capacity, the organization I was with had a motto: “It is better to be trusted than to be loved.” An immediate reaction to that might be to think: If you love someone, don’t you also trust them? That may be true, but If you think about it long enough, certainly you can identify people in your life that you love but don’t necessarily trust completely. Trust is not freely given and does not come in a moment, but over the course of time and is earned by continual credible actions. Trust generates respect, admiration, and appreciation. To be worthy of another’s trust is truly one of the highest aspirations anyone can have.
In our last edition, I introduced the notion that a trusted leasing partner can be a great advantage to those involved in equipment purchasing decisions. The same can be said of a sales person on the vendor side. As a sales person, it can be a tremendous benefit to have quick access to a trusted leasing professional that not only understands equipment financing, but in many cases already knows your customers! We have endeavored at Med One over the years to build a solid reputation based on reliability, responsiveness, creativity, and a solutions-minded approach to equipment leasing. In this process, we believe (and we hope) that our customers and vendor partners have also found Med One to be fair and honest in all our dealings as well.
As I’ve pointed before, an equipment lease of any size is a significant commitment for any organization. For all the benefits and advantages of equipment leasing, (of which we believe there are many) there can also be several unknowns and potential risks to be mindful of as the lease plays out. If you know and trust your lease provider, the risks are presumably reduced or at very least, known and accounted for. By knowing and trusting your lessor you are able to predict, manage and even control some of the variables and unknowns. This is a tremendous advantage to any entity that utilizes leasing on a regular basis. With all of potential advantages that come with leasing equipment, why wouldn’t you want the empowering assurance that your lessor of choice is worthy of your trust?
Med One’s objective in every situation is to win not just a single deal, but to win a customer for years to come! We believe strongly in the value that our industry can provide to consumers, so we seek to help customers experience that value in every way possible.
To gain trust in your lease provider warrants some level of awareness and understanding of potential pitfalls that exist in the leasing world. Whether or not your lessor of choice creates these pitfalls in their normal course of business can and should have a considerable impact on how much you trust and utilize them in the future. A trusted leasing partner should at minimum, understand an organization’s needs and expectations and be ever-ready to present fair, honest leasing solutions to them. Beyond that, help can be provided in a variety of other ways too. Understanding the evaluation of lease pricing, structures, contract language, and the best use of financing solutions in an organization’s overall asset management strategy are key in tapping into the full value and power of equipment leasing solutions.
Some of the pitfalls in leasing are more obvious than others, but in one way or another, they will all cost a buyer more frustration, work, and ultimately money than they may have anticipated. Over the years we have come to realize that customers aren’t always aware of what these pitfalls are. The following are some of the more common ones to be aware of:
Read the Contract
In fairness, terms and conditions in any lease contract are intended to first protect the interests of the lessor. The assumption or at least the hope though, is that lease language also protects the customer and does not burden them with unforeseen costs and obligations. When a lease payment is unrealistically low, it is good practice for a buyer to thoroughly review the lease document for potential hidden costs. If contract language is excessively wordy and/or ambiguous, there could very well be hidden costs lurking that an unsuspecting lessee may not catch. If there is unclear language, the buyer should not proceed without a good understanding of the meaning and intent of the contract language.Trust is built over the course of time and is earned by continual credible actions.
It is generally a good sign when a lessor is willing to discuss, explain and negotiate items within their agreement that the lessee may see as challenging, unclear or even risky. On the other hand, if a lessor is inflexible or unwilling/unable to give clarity to their contract terms, that may be a good time to seek a competitive quote from another source.
It is also good practice to negotiate the equipment price separately from the lease payments. If a buyer focuses first on getting the best purchase price from the equipment supplier, they can then devote their attention to getting the best lease deal possible as a separate conversation. If the two conversations are blended, a supplier and lessor which may even be in cahoots, could take unfair advantage of a customer without them even realizing it.
Additional Fees – Beyond the Monthly Payment
Fees are commonplace in the consumer world. Often when we make purchases for things like sporting events or movies, there’s a small processing fee. Many airlines have baggage fees and hotels have tourist taxes or fees that are slapped on your hotel bill. Sometimes these fees are clearly stated and even expected, but other times they are revealed only when it’s too late to contest or they are simply part of the “price of admission.”
Fees are commonly accepted in many types of lending transactions from ATM fees to mortgages, business loans, and car leases. While this may be the case, fees are not as readily accepted in equipment lease transactions in some business sectors – especially coming from independent, non-bank entities.
If a lessor charges fees outside of the monthly payment, it can quickly become a nickel-and-dime way to enhance yield at a lessee’s expense. This becomes especially misleading and even tilts the playing field against competitors if a lessor quotes a low payment / low rate that does not factor in additional fees they may bill the customer later. That scenario could easily result in a customer choosing the lease quote with the lowest payment when in reality, extra fees may make the low payment option the more expensive option in the long run.
While there may be nothing inherently wrong with this practice, it’s not exactly up front and certainly not customer friendly to charge additional money while at the same time selling a low-balled payment. Extra fees cost the customer additional money, but as yield enhancing devices for a lessor, they are intentionally left out of the monthly payment and do not impact the customer’s perceived interest rate.
Fees Above and Beyond the Lease Payment May Include:
Application Fee: This is a charge just for applying for a lease and may be as much as $1,000! It’s quite possibly the most excessive charge a lessee could face. Application fees vary widely and are charged solely for the purpose of reviewing and then processing a loan or lease application. This fee may also appear as a type of non-refundable deposit. Application fees are an unnecessary cost that a lessee should not have to pay.
Origination Fee: An upfront fee charged for processing a new loan or lease application, used as compensation for putting the deal in place. The amount is typically 1% of the total equipment cost.
Commitment Fee: A fee that is charged to compensate a lender or lessor for its commitment to lend.
UCC (Uniform Commercial Code) Filing Fee: A UCC-1 is a legal form that a lessor typically files to give legal notice to the state where the lessee resides that it has or may have an interest in an asset being used by a lessee. The filing cost varies by state and some lessors charge this nominal fee to the end user of the equipment.
Document Preparation Fee: This fee which can vary widely, is charged by some lenders and covers the expenses associated with the preparation of lease/loan documents.
Processing Fee: A fee of a few hundred dollars that covers the cost of processing a loan or lease.
While some or even all of these extra charges may not be enough to deter a customer from moving forward, why should a lessee be required to cover a lessor’s minor operational costs? When a lessor is chosen on the merits of quoted payment or rate only, it’s best for a buyer to confirm that all-in costs are genuinely low compared to other bids. A simple question like: “What other charges will be billed for after the lease commences?” can quickly level the playing field during the quoting phase of a lease conversation.
Down Payment or Lease Deposit
(AKA first/last payment due up front)
Lease deposits are quite common in equipment leasing and are not necessarily a bad thing if done fairly and transparently – meaning the deposit is applied to or deducted from the principal. If a lease includes a lease deposit, a lessee will want to look closely at how it impacts their quoted rate. If the equivalent of two monthly payments are required as a down payment and the quoted rate is 5% for 60 months, the down payment will impact that 5% rate - with two payments due up-front, the actual rate becomes 5.25%. If the lease deposit is not counted as the first monthly lease payment, then the actual rate inflates to over 8 percent!
A lease deposit is not mandatory, especially if a customer’s credit is solid. It’s just a way to enhance a lessor’s up-front yield on a deal. If this is being required and more importantly if an artificially low rate is hidden within it, a lessee should push back to see if it can be waived or seek an alternative solution.
Advance vs. Arrears Billing and Late Fees
A buyer reads the lease contract and understands full-well the standard late fee. Not to worry though, if they always pay on time – it will never be an issue, right? That’s a safe assumption IF it’s well understood when billing will occur. If the lessor is billing in advance (payment owed the month prior to equipment use) vs. arrears (payment owed on the current month of equipment use), this small detail could easily trigger a late charge the lessee never saw coming. How flexible and/or forgiving is the lessor in the event of a late charge? Some are notoriously rigid and inflexible. So regardless of how unclear or unfair it may seem, the lessee will be stuck with a late charge. All leases have late fees generally around 5% of monthly payment, but some lessors are more fair, flexible, and forgiving on enforcement. Some companies impose late fees even if the customer is only one day late! A grace period and even a notification may be non-existent, and some late fees can be as high as 10 percent. Onerous late fees are another sneaky way for a low-rate lessor to recapture low yield at a lessee’s expense once the deal is signed.
Early Payoff Penalties
Many leasing companies have prepayment penalties. In a contract it may be referred to as a “yield maintenance clause.” Sometimes the prepayment penalty is a fixed percent of the total lease amount which decreases as the lease progresses (5% in year one, 4% in year two, etc.…). The most excessive form of prepayment penalties is when a lessee is contractually required to pay the sum of all future payments in order to pay off the lease. This means the lessee must pay all future projected finance charges and principal payments even if they pay the lease off early! Prepayment penalties can inflate the total amount paid by 20-30 percent. Be very careful to understand early payoff penalties and be especially wary of “sum of all future payments” prepayment language in a lease contract. If a lease contract includes such language, an astute lessor will be better off to pay the lease through to the end of the term rather than incur unnecessary charges by paying it off early.
One of the most important roles of any organization is to help educate and inform its customers and potential customers. By so doing, our hope is that you will come to see Med One as a valuable partner to your own organization and worthy of your trust. We value greatly the business relationships we have established over the years and we continually seek to strengthen them through our own credible and ethical business practices. Our mission is to make equipment acquisitions as simple as possible and in fact, to make a lease transaction even easier than a cash purchase! If we do that, everybody wins. We welcome and appreciate input that can lead to better outcomes and a smoother process for all.