What Does Total Fixed Cost Lease Mean?

Buying real estate or equipment for a business often takes up much of its capital and may seem too expensive for some to do without a little help. Thankfully, options like a fixed cost lease will cut back on your expenses and provide you with an easier-to-afford purchasing option.

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It is worth understanding this option if you’re leasing space or equipment for your business. Doing so is perfect if you want to cut back on your overall costs in a way that makes sense for your business operation’s needs.

What is a Fixed Cost Lease?

A fixed cost lease is a purchase that allows somebody to buy a leased item (such as a home or a vehicle) when the lease term is over. This item’s cost is decided when the lease’s terms are set, creating a set option that cannot rise or decrease throughout the leasing term. Typically, this type of lease lasts over a 12–60-month period, with varying levels of payments depending on total costs.

Many items can be purchased using this type of fixed cost lease. Usually, this lease option is created for high-price items or those that an individual is unlikely to afford with one lump sum. For example, many types of real estate come with a fixed cost lease. A 12-month fixed lease may include several large payments towards the end price and a final purchase price at the end of the term.

So if a piece of real estate costs $50,000 and an individual pays $3,000 for 12 months, they’d have paid off $36,000 of that purchase price. They can then pay the $14,000 extra at the end of this lease term. Or they may have lower payment prices throughout their lease period, setting up a higher end purchase. The purchaser and the seller can set up these factors before the lease is set.

However, it is essential to remember that the purchaser has the right but not the obligation to buy an item at the end of their lease term. For example, someone leasing a $1,000 phone over 12 months may decide not to purchase the phone but lease another one instead. Other types of fixed cost leases provide this kind of flexibility for the purchaser to make them easier to afford.

And the seller cannot force an individual to buy a product they don’t want to purchase. Instead, they are more likely to start another fixed cost lease with that buyer. That said, purchasing at the end of this type of lease is usually a good option because the overall price will be lower and the individual buying the item already has experience with it and understands its benefits and downsides.

Why is This Option Used?

The fixed cost lease is one of the most popular options on the market. Companies like this option because it streamlines their renting and supplying process in a myriad of ways. And buyers like it for its simplicity and its adaptability. Just a few benefits include how it:

Simplifies Your Purchases

When you used a fixed cost lease, you cut back on confusing and hard-to-understand leasing options. Instead of dealing with changing costs affected by market changes, you can purchase the item at a price set well in advance.

Creates Transparent Pricing

Fixed leases produce an incredibly transparent pricing level. Your payments are set out in advance and explained to you throughout the lease. And the final purchasing price is written down, as well, to make this as transparent as possible.

Produces Easier Budget Calculation

When trying to figure out your budget for the year, a fixed cost lease helps create a simple and easy-to-understand series of payments. Rather than confusingly estimating your costs, you know exactly what to expect every month and at the end of the year.

Allows for Stable and Consistent Payments

Non-fixed leases can change and fluctuate based on the market, such as increasing rent costs due to higher interest rates. This fluctuation is impossible with a fixed lease, as you are contractually obligated to pay just what the contract says — no more or less.

Beyond these advantages, many buyers like this option because of its inherent adaptability. Rather than being forced to buy items, you can choose to do so at the end of your lease. And you can change to another option if you want, such as renting newer equipment for your office instead of buying the old stuff.

Do Other Fixed Costs Affect Lease Pricing?

The term “fixed costs” can also be used to identify payments you must make regularly. They are not related to the term fixed cost lease because they refer to elements that may have no lease at all. Just a few fixed costs your business may experience include:

  • Office space rental
  • Supply purchases
  • Payment to your employees
  • Insurance costs
  • Delivery fees

Though you must calculate your fixed costs every month and use them to plan your budget, make sure you don’t confuse them with a fixed cost lease. Doing so will confuse your budgeting and may end up costing you money.

Interesting related article: “What are Fixed Costs?”