Lease Rate Factor

What is Lease Rate Factor?

The lease rate factor is defined as the regular payment which one needs to make when an asset is taken under the lease agreement and is usually expressed as a percentage of the total price of the equipment which has been leased. Alternatively, it can be defined as the single rate factor which when multiplied by the cost of the leased equipment will give the regular stream of payment which one has to do for taking the lease.

Suppose an equipment of cost $10,000 has a lease rate factor of .0260, it means a monthly payment of (10,000 *.0260) = $260. This means that the lessee must make every month payment of $260 for leasing the equipment in consideration for the required number of periods, which is set in the leaseLeaseLeasing is an arrangement in which the asset's right is transferred to another person without transferring the ownership. In simple terms, it means giving the asset on hire or rent. The person who gives the asset is “Lessor,” the person who takes the asset on rent is “Lessee.”read more agreement.

Types

There are primarily two types, which are generally explained as car/equipment lease and space lease rate factor. In-car and equipment leasing the company which leases out the objects primarily purchases the car or equipment from third-party dealers or agents and provides us the same on rent. It means that we are paying for the loan which the lessorThe Loan Which The LessorA lessor is an individual who legally owns the asset granted on a lease (rented for a long tenure) to the lessee who pays a single lump sum amount or regular payments for using that asset.read more has borne to purchase the item by lending money upfront to buy the car/equipment.

Lease Rate Factor

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How it’s Calculate?

Example

Let us take an example of a piece of machinery used to produce toys that have been leased for 5 years with a lease rate factor of 0.008. It means considering the annual rate of interest in the market as 5%; the factor has been calculated by dividing the interest rateInterest RateAn interest rate formula is used to calculate loan repayment amounts as well as interest earned on fixed deposits, mutual funds, and other investments. It is also used to calculate credit card interest.read more with the number of years the lease is concerned. i.e. 0.05/60 = 0.008. For calculating the interest payment, the market value of the equipment plus the residual valueResidual ValueResidual value is the estimated scrap value of an asset at the end of its lease or useful life, also known as the salvage value. It represents the amount of value the owner will obtain or expect to get eventually when the asset is disposed.read more is added and multiplied with the lease factor.

Lease Rate Factor Conversion to Interest Rate

The consideration of both interest rate and the lease factor is very important when we want to check which is costing us less, i.e., whether going into a lease agreement is beneficial to buying equipment where interest payment on loans comes into the picture. A very important number that comes into this comparison is 2400, which gets multiplied to the lease rate factor to arrive at the interest rate.  An example of this can suppose we have a lease rate factor of 0.003 as mentioned above when we want to convert it to the interest rate; we simply multiply the factor with 2400, i.e., 0.003*2400 = 7.2%. Thus, we see here the annual interest rate comes to be 7.2% when the leasing factor is used in 0.003. To cross verify this calculation we can again do a reverse calculation, i.e., 7.2/2400 = 0.003

Why Are They Used?

Lease Rate Factor vs. Interest Rate

The lease rate factor has a money factor instead of an interest rate, whereas an interest rate factor has a percentage rate of interest, which is calculated annually. At any time when we want to convert the money factor or lease rate factor to interest rate, we need to multiply the same with 2400. Lease factors can, at times, make very costly loans look cheaper. Here, the user of the asset needs not to hold the asset with him/her till it reaches its residual value, thus cost savings in this way can be brought in. The loan agreement where interest rate comes into picture the owner of the asset must bear both the charges of the loan and interest and also the residual value of the asset.

Conclusion

It is very important to understand and estimate the overall payment, which needs to be made for the purpose of the lease, or else the lessor can easily add few extra amounts, and the lessee will not even come to know about it. A small extra amount added every month unknowingly can turn out to be a big number at the end of the lease period. It helps us to understand the overall cost of leasing. The interest rate may change depending on the market scenarios, but the lease rate factor once entered into an agreement remains fixed for the rest of the term of the lease.

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