Rate Factors vs. Interest Rates: A Fiscal Deathmatch

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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 can help you diversify the types of debt you’re carrying, 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 goes to http://www.livestrong.com/

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