Fixed or Floating: Which Lease Funding is Best?

Posted on May 22, 2009 by Fleet Financials Staff

Page 1 of 4

Thirty years ago, fixed-rate fleet leases were the norm. "X over/under Prime" was the standard proposal when fleet lessors presented their proposals to the fleet manager.

Then, however, things began to change. Lessors started offering rates that floated, i.e., changed as the underlying debt changed. Loans based on the Prime rate (floating rate money, contrary to what is often believed) were joined by:

■  LIBOR funds: LIBOR is an acronym for London Interbank Offered Rate. These are funds loaned between banks for short-term needs.

■  Commercial paper: These short-term debt instruments are bought and sold between companies, and are also used to fund short-term needs.

■  Treasury issues: This is debt sold by the federal government.

Fleet managers found themselves nearly overwhelmed by the menu of funding possibilities.

The question became one of the fleet industry's fundamental questions: fixed or floating, or even both?

Reviewing Fleet Lease Basics
The open-end terminal rental adjustment clause (TRAC) lease is unique to the fleet leasing industry. There are open-end leases, and there are TRAC leases for other categories of leased assets. However, a combination of the two is the most common method used by companies that lease fleet vehicles.

The fleet lease contains several basic terms and conditions:

■  The lease payments consist of a reserve for depreciation, an interest charge, and an administrative fee.

■  The lease has a short (usually 12-month) minimum term, after which the lessee can terminate the vehicle lease at any time.

■  Vehicles are amortized in a straight line. When replacement is anticipated, the unamortized balance represents the vehicle's fair market value on the open market.

■  When vehicles are sold, the proceeds are applied to that balance. If the proceeds are greater, the lessee receives the excess. If they are lower, the lessee must make up the difference.

The flexibility of the typical fleet lease is its greatest benefit. Vehicles have different missions, drive in different geography, and accumulate mileage at different paces. Fleet managers must be able to replace vehicles at different points in their lifecycles. The open-end TRAC lease enables this flexibility.

View comments or post a comment on this story. (0 Comments)

More News

Hobnob With LCT Editors At LCT-NLA East Show

The three-day event offers ample time for attendees to introduce themselves, discuss their companies, and talk about important industry matters.

Charges Dropped Against Chauffeur In N.Y. Crash

Carlos Pino was indicted in March on four counts of criminally negligent homicide, four counts of assault, reckless driving, and other crimes.

Techie Invests In Tesla Limo Service

The company has saved more than 11,888 gallons of gas and 110 tons of carbon dioxide in its nearly 217,480 miles of travel so far.

Arizona Operator Knows Quality Affiliations Take Time

The Driver Provider’s Mary Beall dishes out some valuable advice for building strong affiliate relationships.

NLA Supports, Celebrates Charities At LCT East

Early bird and group discounts end today, so don’t miss your chance to attend this event at the show!

See More News

Facebook Comments ()

Comments (0)

Post a Comment



See More

See More

See More

See More

LCT Store

LCT Magazine - October 2016 $12.95 COVER STORY: * Leverage Tech To Levitate Your Operations * *


Experience the three annual industry events for networking for business, showcasing vehicles and products, and getting the tools for success.

Read About Your Region

What’s Happening Near You?
Click on any state to see the latest industry news and events in that region.

More From The World's Largest Fleet Publisher

Automotive Fleet

The Car and truck fleet and leasing management magazine

Business Fleet

managing 10-50 company vehicles

Fleet Financials

Executive vehicle management

Government Fleet

managing public sector vehicles & equipment



Work Truck Magazine

The number 1 resource for vocational truck fleets

Metro Magazine

Serving the bus and passenger rail industries for more than a century

Schoolbus Fleet

Serving school transportation professionals in the U.S. and Canada

Please sign in or register to .    Close