What is a lease rate factor?

In Australian equipment and vehicle finance, the factor is the monthly rental per dollar of the asset's cost, usually quoted per $1,000. Multiply the cost by the factor and you have the monthly rental, before fees, insurance and GST. It applies to the whole rental rather than to a separated finance charge, which is what makes it quick to quote.

Two things sit inside the factor. One is recovering the gap between the cost and the residual value the lessor expects at the end of the lease term, which is the depreciation the rental has to cover. The other is the lessor's funding cost and margin. A longer term or a higher residual gives a smaller factor and a smaller rental, but leaves more to settle at the end.

On imported or dealer paperwork you may meet the American convention, where the same idea is called a money factor. There the payment is split in two: a depreciation part, being capitalised cost minus residual divided by the term in months, and a finance charge, being capitalised cost plus residual multiplied by the money factor. It is shown as a small decimal, labelled money factor, MF or simply rate.

Because that factor is monthly, the usual shortcut is to multiply it by 2400 (12 months x 100 x 2) for an approximate annual percentage rate, and to divide an APR by 2400 to go back. It is a ballpark, not an effective rate. For an exact comparison, work out the internal rate of return on the actual rental stream plus anything payable at the end.

A lease quote only lines up against a chattel mortgage or business loan once you look at total cost over the term: every lease payment plus fees plus any residual guarantee payable, against loan repayments plus any balloon payment, fees and interest. Convert the factor to an annual figure, or compute the IRR of both structures, to compare the finance cost on the same footing.

Ownership differs too. With a loan you own the asset, carry the residual risk and keep any sale proceeds. With a lease the lessor owns it, and at the end you return the asset or pay the residual to buy it, so market value matters if a residual guarantee applies. Leases often make upgrades easier; loans may cost less over the long run if you keep the asset beyond the repayment period.

GST is typically payable on each lease instalment, and an eligible GST-registered business claims the input tax credit progressively, whereas buying with a loan means claiming the GST on the purchase price in the period of purchase. Whether the rentals are deductible depends on whether the ATO treats the arrangement as a genuine lease or as a sale, and on business use. The accounting classification under AASB 16 is a separate question, and vehicle leases used by employees can carry FBT implications. Check the ATO's guidance or your accountant.

The factor itself can be negotiated. Ask the lessor to show the calculation, including the buy rate versus any markup, and get several quotes, including through a broker, who can sometimes access lower buy rates for equipment finance. A larger deposit or better pricing reduces the capitalised cost and the finance charge base, while a higher residual lowers the payment but raises end-of-term risk.