Early Termination Clauses for Leasing Contracts with APR Cap

Abstract

Terminating a leasing contract early may entail the payment of additional charges attributable to penalty and late payment costs. The occurrence of these extra charges push the lease effective Annual Percentage Rate (APR) up. The aim of this note is to discuss the contract early termination extra charge conditions which guarantee the no exceedance of a given APR threshold, whenever the contract expires. In the event the contract provides the lessee the option to terminate the lease prior to the first payment, extra charges shoot APR extraordinarily up and so the penalty costs should be set at zero. In the occurrence that the contract terminates upon the first payment date due to lessee’s exercise of the early termination option, the most severe compliance conditions are those if the termination occurs at the first payment date. If the early termination occurs for lessee’s insolvency, the most severe compliance condition is at correspondence of the first admissible date of the contract redemption for insolvency after a minimum number of unpaid payments. The late payment cost compliance condition requires only that the late payment interest rate not exceeds the given APR cap. Our findings hold whatever the payback amortization is set at the date of entering into the contract. If the French amortization (fixed installments) is used, the compliance constrains turn out looser than those valid for a general amortization.

Pricing a Lease Contract in Presence of Late Payment Extra-Charges

“…Designing leasing contract conditions that allow to move EAR -all else being equal -is a key issue in developing contract conditions on the pattern of payments (see Carretta & Nicolini, 2009;Quattrocchio et al, 2018). A general rule comes out: to stick EAR to the contract lease rate the Macaulay Duration should be set long.…”