A lease rate factor is the regular lease payment as a percent 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 simplistic way of getting the payments but it is not that simple.
So it is important to understand that the lease rate factor is not an interest rate but it is derived by cash flows from an interest rate. If you wanted to develop a series of lease rate factors, you would create a lease of let’s say $100,000 with an interest rate of 10% over 5 years and then you would build a matrix based on the deal structures. For instance, do you have a payment or two in advance or do you have payments in arrears? This assumption 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.
Let’s do a couple of examples. 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 assume a residual to keep it simple. With two payments in advance, your payment would be $2,090.09 or a rate factor of .0209009 based on the $100,000 lease. With one payment in advance, your payment would be $2,107.14 or a rate factor of .0210714. With one payment in arrears, your payment 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.
Generally, when leasing companies build their lease rate factor matrix, they will do one for different interest rates, for different terms, and potentially different deal structures. As you can see there can be numerous variations depending on the variables.