The Cost of Credit in the Presence of Missed and Delayed Payments Fees

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.