If you’re mulling a lease versus a loan, it might be helpful to understand some of the basic terminology. I’ve put on my sweater with the elbow patches and my horn-rimmed glasses and I’m about to drop some knowledge on you. Feel free to take a seat.
Today, we’re going to cover what differentiates rate factors from simple interest rates. Probably most of you are familiar with APR interest rates, which leads to regular payments where a portion goes to principle, and a portion towards accrued interest. They accompany loans, such as the ones you have on your house, your business, your equipment, and on and on and on. Most of us have a lot of loans.
Rate factors, on the other hand, are a periodic payment calculated as a percentage of the equipment cost that you’re leasing. They’re a little more complicated on first glance, but the formula works out pretty well.
Just for kicks, let’s say you have a rate factor of 0.10 on your tractor, which cost you $25,000. By multiplying the factor by the total cost, you wind up with about $2,500 per month in rate factor payments.
Of course, another difference between leases and loans is that you have the option of paying a loan off early, should you muster up the money to do so. Leases typically require smaller down payments, if any, and generally come without the restrictive covenants found on a loan, such as blanket liens, so there’s certainly advantages to pursuing one if you’re in need of small business capital.
So there’s our brief lesson for this Thursday morning. I hope you learned something today.
Photo credit to lolo_stock at http://www.sxc.hu/photo/1331234
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