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Interest Rate vs Lease Factor

Usually one of the first questions we get here at Alternative Financial is, “What are your interest rates”.

Before we go in to interest rates and lease factors, borrowers should understand we have built a niche dealing with credit challenged businesses where the risk is a little higher.  We have the ability to get you the money when you need it when most other traditional lending institutions are not willing to share their capital with you.

Collateral or asset based lending keeps the flow of capital going in tough economic times when traditional financing options have increased their underwriting requirements.  Meaning businesses that need working capital, or to purchase or lease equipment for their next project can’t find the money through “normal” banking methods.

That is where Alternative Financial comes in to keep the flow of money going which helps businesses stay a float so employees can get paid and make their hard earned and well deserved compensation for their families.

Risk for the lender is always a factor in determining an interest rate or lease factor.  Let’s quickly define “interest rate” and “lease factor”.  The interest rate is the amount charged, expressed as a percentage of the amount being borrowed.

Example: In general. If you borrowed $1,000 at 9% for 12 months you would owe $90.00 in interest. Divide $90.00 by 12 and your monthly interest payment would be $7.50 on top of the principle to be paid back per month.

The lease factor is the periodic (usually monthly) payment expressed as a percentage of the cost of the equipment.  The lease factor contains the interest payment as well.

In the leasing industry you may see a lease factor that looks like this .0200.  The lease factor is 2%.

Example: In general.  If you borrowed $100,000 with a lease factor of .0200 over a term of 60 months then your lease payments would be $100,000 x .0200 = $2,000.  In order to determine your interest rate you would need to divide $100,000 by the term 60 months, which is roughly $1,666.  Now subtract $1,666 from the lease payment of $2,000 and that give us roughly $333.

To figure your annual interest expense multiple that number by 12.  $333 x 12= $3,996
Take $3,996 and divide that by $100,000 and your annual interest rate would be around 4%.

We do need to take into consideration the interest rate, but the total lease payments are what you will be actually paying based upon the terms and collateral being used to secure the funding.  Lease factors are usually expressed in decimal form such as .0200 which translates in to a percentage 2% of the total cost of the loan or equipment over the term which is usually 30, 36, 48, or 60 months.

We have given you these examples to help you understand the difference between your lease payments and an actual interest rate.  Next we will discuss general factors that go in determining your lease payments.  We hope this information will help give you a better understanding of Collateral or Asset based leasing.

We are here to help you continue to grow you businesses when you are in need of working capital, purchasing or leasing.  Keep on the lookout for our latest blog and news.

Your financing partner team,