What are 'Lease Payments'

A lease payment is the equivalent of rent under a contract granting use of real estate, equipment, software or other fixed assets for a specified time. The length of lease payments could range from month to month, as in SaaS, software-as-a-service business models or sometimes very long lengths of time, such as 100 years under a land-lease scenario.

A lease payment amount is determined by such things as asset value, residual values, discount rates and a lessee's credit score.

BREAKING DOWN 'Lease Payments'

Lease payments can be made by individuals as well as companies. Leases are most commonly used by individuals to finance cars, but can also be used to obtain computers and land, among others things.

A company's lease payments are used in the calculation of the fixed-charge coverage ratio. This ratio helps investors see if a company can cover its fixed expenses, such as leases and interest.

Common Types of Leases

Common leases types include operating leases, financial leases (also called capital leases), sale-and-leaseback arrangement and combination leases which often combine elements of the prior leases but don't fit neatly into one category.

The most significant characteristic of an operating lease is that provides for both financing and maintenance. Meaning, lease payments include an element for financing charges as well as a maintenance component. Which requires the lessor to maintain and service the leased equipment. As an example, it is not uncommon for an owner of an aircraft to lease jets engines. Because the owner likely doesn't specialize in parts and maintenance for such highly technical components, it makes sense to include a maintenance charge directly with a lease payment. For instance, Pratt & Whitney leases many jet engines to airlines and aerospace manufacturers, knowing their equipment best, it makes natural sense for Pratt & Whitney to service their equipment.

Financial leases differ from operating leases in that they do not provide for maintenance in lease payments.

Newer leases types which often offer more customized service levels and lease payment structures include synthetic leases and lease tied to mileage, hours, or some usage level. For example, General Electric often leases expensive locomotive components with lease payments tied to mileage. In theory, a lessee is only paying for what they need.

RELATED TERMS
  1. Capitalized Lease Method

    An accounting approach that identifies a company's lease obligation ...
  2. Lease Utilization

    A financial ratio that measures how much a company uses leasing ...
  3. Open-End Lease

    An open-end lease is an agreement that requires the lessee to ...
  4. Gap Amount

    Insurance will only cover a certain amount of coverage if leased ...
  5. Graduated Lease

    A type of long-term, typically for commercial property, lease ...
  6. True Lease

    A specific type of multi-year lease which does not pass on ownership ...
Related Articles
  1. Managing Wealth

    Why You Should Buy A Car Instead Of Leasing

    While leasing has certain advantages, buying a car tends to save you money in the long run and offers greater flexibility.
  2. Investing

    Uncovering Hidden Debt

    Understand how financing through operating leases, synthetic leases, and securitizations affects companies' image of performance.
  3. Managing Wealth

    4 Ways to Get the Best Deal on a Car Lease

    Car buyers typically negotiate when purchasing a vehicle, but many don't negotiate when leasing a car. There are several ways to save if you ask.
  4. Managing Wealth

    Your Lease Is Up: When Should You Buy The Car?

    In general, the fact that you know the car is to your benefit. Before deciding, compare the buyback price to what the car would go for on the open market.
  5. Managing Wealth

    Millennials Guide: How To Read a Lease

    Everything you need to know before you rent a home.
  6. Investing

    Buying a House with Tenants: A Quick Guide

    Before buying a house with tenants, know the risks and responsibilities you're taking on.
  7. Investing

    Should You Buy Property on Leased Land?

    Find out what to consider before investing in a leased-land property.
  8. Investing

    The Booming Business Of Container Leasing

    Railroad and shipping volume has been steadily on the rise.
  9. Managing Wealth

    Rental Properties: Cash Cow Or Money Pit?

    Create a valuation system to forecast the profitability of an income-producing property.
RELATED FAQS
  1. What is the importance of residual value in an automobile lease?

    Find out how dealerships assign residual value and why this is an important factor in car leases. Learn about a tactic some ... Read Answer >>
Hot Definitions
  1. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  2. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  3. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  4. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  5. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  6. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
Trading Center