What is a Rate Factor?
Instead of giving sales reps or partners yield rates, many times finance
companies will give their partners rate cards. These are updated on a
regular basis (monthly for example). On the rate card, it will give the
rate factor based on the amount/term. So if it is .04522730 on a 24 month
loan contract for $100,000 they can easily calculate the payment amount
100,000 * .04522730 = $4522.73/month payment. It is just a way to
give their sales reps or partners an easy way to calculate the payment amount on the
fly. This obviously does compute to a rate, but a financial calculator or
TValue is not needed to get a quick payment.
On leases, this is very common because true “yields” are rarely given.
The first two examples are loans at an even $100,000. The third example is a Capital Lease at $100,000. Even when residual is included in the lease calculation, the rate factor will still provide the value of the payment amount. Obviously with step/skip payments this is not as easily applicable.
Here is another example: $100,000 loan with 48 payments. The Rate Factor is 0.25
$100,000 x 0.25 = $2500 per month payment
Capital Lease with a 5% residual. If I would remove the residual and calculate the contract payment schedule again (resetting the initial contract rate to 10%) it will again calculate properly.
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