A true story by Barry Reitman, President, Keystone Equipment Leasing, Inc.
A couple of years ago, I received an unsolicited call from a representative of one of the largest banks in the country. "I have been authorized to offer Keystone Equipment Leasing a preferred rate loan. The first year has a fixed seven and a half percent interest rate with no fees. Beginning the second year, the rate will be Prime plus one percent, and there will be a fee of just one percent of the entire line. What’s more, because of your fine credit rating and reputation, we will loan up to fifty thousand dollars without requiring financial statements. And that’s not all. [By now, I’m waiting for the six free steak knives]. We will provide a free business checking account. Just write out a check for your loan proceeds as you want them."
"All we ask," he added, his enthusiasm changing to the rapid-fire drug interaction warning whispered at the end of a Viagra commercial, "is that you keep ten thousand dollars in that checking account."
Heck, that ain’t hard, Mr. Viagra Banker. You just gave me fifty grand to play with.
Now let’s take a closer look. If I need $40,000, I have to borrow $50,000. Forty for me; ten for the "free" checking account in which I must maintain ten thousand dollars. (What’s that you say? You usually keep ten thousand dollars in your checking account? Well, it’s a long way from usually - or average - to gotta.) So, I can use forty, but pay interest on fifty. At seven and one half percent per year, the payment on a three year, $50,000 loan is $1,555.31 per month.
Now, $1,555.31 a month to pay off a three year FORTY THOUSAND dollar loan is, er, let’s see, 23.33 percent. And in year number two it goes up to Prime plus one (plus a one percent fee). Even if there are no further increases in prime rate, payments will be $1,625.12 based on $50,000, and I can use only $39,500 ($50,000, less $10,000 in the non-interest bearing "free" checking account, less that pesky one percent fee). That works out to an effective interest rate of 27.59 percent.*
Your Keystone lease of equipment worth $39,500, with first and last payment in advance and a small documentation fee, is going to be hundreds of dollars less each payment, with a one dollar purchase option. Payments are even lower than that with a Fair Market Value or ten percent purchase option, giving you possible significant tax benefits, and, and, and ... and we won’t insult you with lies about "seven and a half percent" or "prime plus one." We will simply give you the lowest payment possible. Please compare our quotes to any bank or leasing company. But compare dollars to dollars, and terms to terms. Will we have the lowest real rate? Surprisingly often we will. And we will never try to confuse you with misleading terms.
Thanks for listening. Your comments are welcome.
Barry Reitman
baldguy@keystoneleasing.com
(800) 225-3489 (800 BALDGUY)
* This happened when Prime was at 9.5. Assuming Prime down to 5%, that REAL bank rate is still 22.61% !
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