An Overview of Implicit Interest Rate Calculation in Lease Method

House sitting on one hundred dollar bills

In the world of buying, selling, mortgaging etc., the word lease is so common. The lease is a method that can be used for any commodity that can be tangible or intangible. The tangible properties include things like cars, jewels, electronics and the intangible properties include things like a piece of land, building, warehouse or even sometimes residential complexes are leased for a particular duration of time.

There is no rule that lease is done only for a longer duration of time. The amount fixed and the terms & Conditions only play a vital role in the leasing process.

What Are The Exact Parameters That Are Needed Before The Calculation Of The Implicit Interest Rates?

The following four parameters should be known before leasing out:

  • Present Value of the commodity that is being leased
  • Value that has to be paid on a monthly basis (In case, a person is not aware of the monthly payment that has to be made, he/she can divide the lease payment which is usually given in yearly basis by the number of the months that make up the year)
  • The number of monthly installments/ the period that has been mentioned in the lease payment has to be known. (The value of n)
  • Future Value of the asset that is to be returned.

Thus, by knowing the value of the above-mentioned parameters, one can learn how to calculate lease implicit interest manually in case of not relying upon the calculators that are available online.

Advantages of Implicit Interest Rates

The implicit interest rates pose several advantages:

  • Better Contracts can be found out
  • Profitable for the lender
  • Repair works can be made with the interest amount

Thus, from the above points one can see that Implicit Rate Calculation methods hold an important place in leasing procedures.