How to convert money factor to interest rate?
Joe
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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Dave Dodson
> 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?
According to http://www.leaseguide.com/lease08.htm (which you should
read):
Interest Rate = Money Factor x 2400
Dave
cam...@earthlink.net
> 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.
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!
joeu2004
> I an manually plugin and change an interest rate in a
> mortgage program until the interest rate provides the
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:
=12*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:
http://www.leaseguide.com/lease08.htm
http://www.leaseguide.com/lease09.htm
joeu2004
On May 3, 7:22 pm, I wrote:
> Ostensibly, you can plug those values into the Excel
> RATE function to get an answer. For example:
> =12*RATE(60,-450,20000)
> 1/12th of that is the "money factor" -- that is,
> simply RATE(60,-450,20000).
Of course, that should be 1/24th and RATE(60,-450,20000)/2.
> See the explanation on the following web pages:
> http://www.leaseguide.com/lease08.htm
.... 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.
TechLease
> On May 3, 11:39 am, Joe <JoSc...@yahoo.com> wrote:
>
> > I've been offered a chance to invest in fundingequipmentleases.
>
> > 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.
>
> 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.
>
> HappyLeasing!
>
> --------------------------------------
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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