The Cost of Credit in the Presence of Missed and Delayed Payments Fees | Chapter 7 | Current Strategies in Economics and Management Vol.5

Partial insolvency in leasing contracts may entail affording additional costs. In this paper, we focus on the case that the lessee makes partial payments in due time and settles the debt increased by the late payment interests later. The presence of the extra-costs drives the lease Effective Annual interest Rate (EAR) to deviate from the lease contract rate. This work aims to illustrate how design the contract payback amortization to stick EAR to the lease contract rate, when the lease contract rate, the late payment rate, and the contract terms are exogenously fixed. First, we achieve a proxy for EAR given by the lease contract rate plus an extra-charge rate addendum. We show that this last addendum is sensitive to the payback Modified Duration, a weighted size, and timing average. Specifically, the longer the Modified Duration, the smaller the extra-charge rate addendum. As a consequence, two general rules to drive EAR close to the lease contract rate to roll out, specifically: (1) the payment pattern should be set with a long Modified Duration; and (2) the surrender value of the leased good should be put large. As the contract settlement is given, we identify a lower bound and an upper bound for EAR. The results of the paper are useful to provide policymakers a better knowledge about the effects on EAR of the contract conditions on the pattern of payments.

Author(s) Details

Luciano Quattrocchio
Department of Management, School of Management and Economics, University of Torino, Torino, Italy.

Luisa Tibiletti
Department of Management, School of Management and Economics, University of Torino, Torino, Italy.

Mariacristina Uberti
Department of Management, School of Management and Economics, University of Torino, Torino, Italy

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