Insider wrote yesterday that prepayment penalties are one of the disadvantages of equipment leasing.

Almost all equipment leasing companies have prepayment penalties.  Insider can think of one exception – Billboard Loans – a finance company which Insider manages.  Sometimes the prepayment penalties are called yield maintenance clauses.  Sometimes the prepayment penalty is a fixed % of the lease amount (5% in year 1, 4% in year 2, 3% in year 3…).

The death penalty prepayment clause says that you must pay the sum of all future payments in order to prepay the billboard financing lease. This means you must pay all future projected finance charges and principal payments even if you pay the lease off early. Prepayment penalties can amount to 20-30% of what you originally borrow.

Here’s an example. Suppose you lease a $150,000 digital billboard at an annual financing charge of 10% with 60 monthly payments of $3,187.  Lamar makes you an incredible offer the month after the board is built and you call your leasing company to ask for a payoff. They will tell you owe $191,224 or 60 times $3,187. That’s a prepayment penalty of $43,161 or 29% of the amount that you originally borrowed.

If you make all scheduled lease payments for one year and then want to prepay the lease you will owe $156,000 which is $19,151 or 19% more than the $125,660 balance remaining on the lease after year one.

Insider’s take: (1) Never accept sum of all future payments prepayment language in a lease.  (2) Never sign an equipment lease if you plan to sell your company before the lease expires.