 During
the past year or two, I have heard many people sing the praises computer leasing. Their
favorite feature: the ability to trade in their old system for a new one--in effect, a
hassle-free way to keep their computer networks up-to-date.But are leases really as
attractive as their proponents claim? Here is the inside scoop so you can make an informed
decision next time you need a new system.
Financing options
Unless you have cash available to make an outright purchase, you will need some form of
financing. Typical choices include bank loans, installment purchases and leases. Your
decision should be based primarily on financial and tax considerations.
Whichever type of financing you choose, the source will make its money by applying an
interest rate to the amount financed. As with any other product or service, interest rates
(prices) vary, so it pays to shop around.
Hiding the ball
The problem is that shopping for leases takes more work than does shopping for other
forms of financing. If you take a bank loan, you can easily find out what your
interest-rate formula (e.g., "prime plus 1 percent") means on any given day. If
you make an installment purchase, the annual percentage rate (APR) is the key number.
But leases are trickier. There is no stated APR, and the lessor may not even tell you
the finance rate being charged.
An example: Several years ago, I spoke with Dell about leasing a notebook PC. I asked
what the finance rate was; Dell's representative claimed he did not know.
So I put the purchase price, monthly payments and residual value into an Excel
spreadsheet and calculated a finance rate of twenty-one percent! I went elsewhere.
Upgrading systems
So what about this idea that you can upgrade your system in the middle of a lease? This
is a convenience, but it comes at a price.
As soon as you take delivery of your system, its value plummets. By the time you are
ready to upgrade, the fair market value will be a small fraction of the original price.
But, as with a home mortgage, the principal balance outstanding stays relatively high
during most of the lease. Early payments are largely dedicated to paying interest. You
have to be well into the lease before the principal amount is reduced significantly.
Thus, when you decide to upgrade during the lease, your system value will be
substantially less than the principal balance--i.e., your system will have a negative net
value. This negative net value will be added to the price of the new system and
refinanced. In other words, not only did you pay for the original system during the first
lease--you will pay for it during the second lease, too!
Taking advice
So does this mean leasing is always a bad idea? Not at all. But it does mean that lease
provisions must be scrutinized and the finance rate must be uncovered.
Finally, be careful about the lease term you choose. Today's hardware has a useful life
of about three years. If you go with a lease (or any other financing arrangement) longer
than that, you may have to install and start paying for a new system before the old one is
paid off.
 Dana H.
Shultz is an Oakland-based lawyer, certified management consultant and speaker
specializing in office technology and online marketing. He may be reached by e-mail at dhshultz@ds-a.com and on the World Wide Web at www.ds-a.com.
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