In a prior post I covered the difference between apples and oranges and how oranges taste so much better. Never mind that was on another blog, I did however cover the differences between a lease and a loan and as promised I wanted to clarify some of the common residual types.

In review…

A Lease by nature has to have some type of residual at the end; imagine a residual to be a portion of the original cost that is left unfinanced. Common residual options include but are not limited to $1.00, 10% and FMV. Each of the options can be coupled with the words “Purchase Agreement” or “Purchase Option”. (Remember this for next time.)

$1.00 Residual: this is typically the most common type of lease to purchase structure. In this agreement the customer is financing all of the equipment cost minus $1.00. (Now obviously the $1.00 residual is somewhat of a technicality that qualifies this as a lease structure) This structure yields the highest monthly payments but also a next to nothing residual at the end.

10% Residual: in the case of a 10% residual the customer is financing 90% of the equipment cost leaving the remaining 10% as a residual at the end of the term, hence the name. This structure has a lower monthly payment than a $1.00 for obvious reasons but also has a 10% Residual or “balloon” payment left at the end of the term, which in most cases can be financed again, or of course paid in full in cash.

FMV Residual: though not difficult to understand this structure typically is difficult to explain so I will reserve this for a later date and time.

Stay tuned while I formulate my thoughts on explaining the difference of a purchase option versus purchase agreement and the infamous FMV.