What is ‘Lease Balance’
The amount of money that a customer owes under the terms of a vehicle lease contract. The lease balance becomes important in two main situations. The first is in the event that a car is stolen and not recovered, is totaled in an accident or is otherwise destroyed. The second situation is if the lessee wants to terminate the lease early for any other reason.
Explaining ‘Lease Balance’
A vehicle’s fair market value is often different from its lease balance, because vehicles depreciate quickly at the beginning of their life but lease payments are flat over the life of the agreement. When a lease agreement is terminated for any reason, the lease’s early termination payoff provision is used to calculate the lease balance and determine how much the lessee must pay to end the agreement. This amount could be several thousand dollars.
In the first situation, insurance will cover only the vehicle’s fair market value, and the lessee must make up the difference through gap insurance or by paying out of pocket. In the second situation, the lessee cannot simply turn in the car to the dealer and walk away; he must pay the difference out of pocket or avoid the payment by transferring the lease to another party.
Further Reading
- Market Evaluation of Off-Balance sheet financing: You can run but you can't hide – papers.ssrn.com [PDF]
- Capital structure and the changing role of off-balance-sheet lease financing – papers.ssrn.com [PDF]
- Operating lease finance in the UK retail sector – www.tandfonline.com [PDF]
- Impact of lease capitalization on financial ratios of listed German companies – link.springer.com [PDF]
- Bankruptcy costs and the financial leasing decision – www.jstor.org [PDF]
- Operating leases: Impact of constructive capitalization – search.proquest.com [PDF]
- Realized returns and the default and prepayment experience of financial leasing contracts – www.jstor.org [PDF]
- Financial reporting quality, private information, monitoring, and the lease-versus-buy decision – meridian.allenpress.com [PDF]
- Lease accounting: A review of recent literature – www.tandfonline.com [PDF]
- The impact of operating leases on firm financial and operating risk – journals.sagepub.com [PDF]
