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Have you ever been quoted a “lease factor” and you don’t know what it means? A lease rate factor is the regular lease payment as a percentage of the total cost of the leased equipment. Stated another way, if you multiply the lease rate factor by the cost of the leased equipment, you will determine the regular payment amount. The lease rate factor is a seemingly simplistic way of getting the payments but it is more complex than it appears.
It is important to understand that the lease rate factor is not an interest rate, but it is derived from the cash flows based on an interest rate or a yield. If you wanted to develop a series of lease rate factors, you would create a lease of $100,000 for example, with an interest rate of 10% over 5 years, and then build a matrix based on the deal structures. Do you have a payment or two in advance or do you have payments in arrears? These assumptions will change the payment and thus the lease rate factor. What about a residual? If you have a residual of 5% or 10% it will also affect the lease rate factor.
Here's an example that illustrates how the lease rate factor can change. Let’s assume a $100,000 lease at 10% for 60 months with one payment in advance, two payments in advance, and payments in arrears. We will not factor in a residual for this example to keep it simple.
With two payments in advance, your payments would be $2,090.09 or a rate factor of .0209009 based on the $100,000 lease. With one payment in advance, your payments would be $2,107.14 or a rate factor of .0210714. With one payment in arrears, your payments would be $2,124.70 or a rate factor of .0212470. If you factor in residuals, you will change the payments and rate factor again. Here is the calculation in TValue 6 with two payments in advance to determine the rate factor.
Generally, when leasing companies build their lease rate factor matrix, they will do one for different interest rates, for different terms, and for different deal structures. As you can see, there can be numerous variations depending on the variables. TValue is the perfect program for these calculations to determine the rate factor and to calculate either the interest rate or yield on the deal.
If you are interested in TValue software, please visit our website at www.TimeValue.com. If you have any questions using TValue, please give our Support Team a call at 800-426-4741 or email at support@TimeValue.com.
