How to convert money factor to interest rate?

I've been offered a chance to invest in funding equipment leases.

While researching the field, I haven't found anyone that can (or will) explain how to convert lease rates or money factors to interest rates.

I an manually plugin and change an interest rate in a mortgage program until the interest rate provides the same payment, but now I'm really curious about how lease firms determine the money factor.

Is it a basic equation, or something more advanced?

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Reply to
Joe
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According to

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(which you shouldread):

Interest Rate = Money Factor x 2400

Dave

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Reply to
Dave Dodson

Money Factor = Interest Rate /24

P = Principle R = Annual Interest Rate N = Number of Monthly Payments L = Residual (R is already taken) M = Monthly Payment MF = Money Factor

M = (P - L)/N + (P + L)*R/24 M = (P - L)/N + (P + L)*MF

Oooh, that was mysterious.

Happy Leasing!

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Reply to
camgere

No. If you have the payment amount, total funded amount and the number of periods, there is no simple formula for determining the interest rate. It is an iterative process, much like the one that you did manually.

Ostensibly, you can plug those values into the Excel RATE function to get an answer. For example:

*RATE(60,-450,20000)

1/12th of that is the "money factor" -- that is, simply RATE(60,-450,20000).

However, that is not really the interest rate (or money factor) that is used for the financed part of the lease payment. You need to factor in a number of other amounts.

See the explanation on the following web pages:

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Reply to
joeu2004

Of course, that should be 1/24th and RATE(60,-450,20000)/2.

.... Which says that the interest rate is 2400 times the money factor. The extra 100 multiple is simply to convert, for example, 0.125 -- the true representation of 12.5% -- into 12.5.

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Reply to
joeu2004

Those equations above seem mysterious to me, and the answer is not that straight forward. The Lease Rate Factor, (or Money Factor as you call it) is the month lease payment divided by the equipment cost. Lessors say they like to use it instead of interest rate because it is easy for the Lessee to determine the new monthly payment if the equipment cost changes from its original quoted value. For example, the montly payment = Lease Rate Factor * Equipment Cost Sometimes Lessors quote the Lease Rate Factor to disguise the real APR or annual percentage rate. It can be quite high as compared to a loan with a bank. To convert the Lease Rate Factor to interest rate, you need to use a program like T-Value or International Decision Systems (Info Analysis), to back out the interest rate given the lease payment, equipment cost and assumed residual value. First, calculate the Monthly payment using the calculation above. Then, solve for the interest rate by plugging in the three variables: Lease payment, equipment cost, and residual value.

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Reply to
TechLease

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