Length of Lease Term

The interest rate that a lessee will receive corresponds with how long they will be borrowing the money for. This may seem obvious to some, but it is important to understand why this happens.

Simply put, the longer a lender has to lend a business money, the greater chance there is that the loan will not be repaid. And as that repayment term stretches, the risk of not receiving the full amount back increases as well. Most business owners can say for certain that their doors will be open in one year, but ask where they might be in 10 years and no one really knows. Lenders expect to be rewarded for larger risks, therefore they will require a higher interest rate for lending money longer.

Of course, this is not always the case. There have been instances where short term rates were equal to and even higher than long term rates. This is generally caused by great uncertainty in the market. When evaluating equipment financing and leasing needs, businesses must be conscience of how long they really need to borrow the money for. Often times, a much lower rate is available for a 1 or 2 year shorter term.  While the payment will be higher because the loan/lease is being repaid quicker, the overall interest expense will be much lower and can help a businesses bottom line.