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Factor Rate Formula:
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The loan factor rate is a simple ratio that represents the total repayment amount divided by the original principal. It provides a quick way to understand the cost of borrowing in relation to the amount received.
The calculator uses the factor rate formula:
Where:
Explanation: The factor rate gives a multiplier that shows how much you need to pay back for each dollar borrowed. A factor rate of 1.2 means you pay back $1.20 for every $1.00 borrowed.
Details: Understanding the factor rate helps borrowers compare different loan offers and understand the true cost of financing. It's particularly useful for merchant cash advances and short-term business loans where factor rates are commonly used instead of annual percentage rates.
Tips: Enter the total repayment amount and the original principal amount in dollars. Both values must be positive numbers greater than zero.
Q1: How is factor rate different from interest rate?
A: Factor rate is a simple multiplier (e.g., 1.2) while interest rate is expressed as a percentage per period. Factor rates are typically used for short-term financing.
Q2: What is a typical factor rate range?
A: Factor rates typically range from 1.1 to 1.5, depending on the lender, loan term, and borrower's creditworthiness.
Q3: How do I convert factor rate to APR?
A: To convert to APR, you need to consider the loan term. The formula is more complex and requires knowing the repayment schedule and time period.
Q4: When are factor rates commonly used?
A: Factor rates are commonly used in merchant cash advances, invoice factoring, and some short-term business loans rather than traditional installment loans.
Q5: Is a lower factor rate always better?
A: Generally yes, a lower factor rate means you pay back less in total. However, you should also consider other loan terms and fees when comparing financing options.