Factor Rates vs. Interest Rates: The Math Lenders Hope You Ignore

A lender offers you $100,000 with a "1.25 factor rate." Another offers $100,000 at "25% interest." Which costs more? If you cannot immediately answer, you are not alone — and that confusion benefits lenders.

Factor rates and interest rates measure cost completely differently. Understanding the difference can save you tens of thousands of dollars.

What Is a Factor Rate?

A factor rate is a simple multiplier applied to your borrowed amount. Borrow $100,000 with a 1.25 factor rate, and you repay $125,000. Period.

What Is an Interest Rate?

An interest rate (APR) charges you based on what you currently owe. As you make payments and reduce your balance, your interest cost decreases. This is how mortgages, car loans, and most traditional loans work.

On a $100,000 loan at 15% APR over 3 years, you pay ~$24,700 in interest. But that interest is calculated on a declining balance — you are not paying 15% on $100,000 every year.

Why Factor Rates Cost More Than They Appear

Here is the problem: a 1.25 factor rate sounds like "25% cost." But the equivalent APR is much higher because you pay that 25% on the original amount even as you pay it down.

The Calculation

Here is a simplified way to estimate APR from a factor rate:

• Step 1: Calculate total cost. ($100,000 x 1.25 = $125,000. Cost = $25,000)
• Step 2: Calculate average balance. (For daily payments, roughly half the original: $50,000)
• Step 3: Annualize the cost. ($25,000 cost / 12 months x 12 = $25,000 annual cost)
• Step 4: Divide by average balance. ($25,000 / $50,000 = 50% effective APR)

Real-World Comparison

Let us compare two $100,000 financing options:

The factor rate product has a lower total dollar cost ($25,000 vs. $30,140) but is actually far more expensive when measured by APR. Why? Because you are paying it back in 12 months with daily/weekly payments instead of 36 months with monthly payments.

If both were 12-month terms, the term loan at 18% APR would cost ~$10,000 in interest — less than half the factor rate product.

Why Do Lenders Use Factor Rates?

Factor rates are not inherently deceptive, but they make costs less transparent:

• Simplicity — "Multiply by 1.25" is easier to explain than amortization
• Marketing — "1.25 factor" sounds cheaper than "50% APR"
• Legal — Some factor rate products (like MCAs) are technically not loans and avoid APR disclosure requirements
• Comparison difficulty — Harder to compare against traditional loans

Which Products Use Which Rate Type?

Protecting Yourself

Before signing any financing agreement:

• Always ask for total repayment amount — This is the clearest cost measure
• Request APR disclosure — Even if not required, reputable lenders will provide it
• Calculate effective APR yourself — Use online calculators if needed
• Compare apples to apples — Convert everything to APR before comparing
• Watch for prepayment — Factor rate products often have no prepayment benefit (you pay the full factor regardless)

The Bottom Line

Factor rates are not scams — they are a different way of expressing cost. But they can make expensive financing look cheaper than it is.

A 1.20 factor rate sounds reasonable. The equivalent 40-60% APR does not. Lenders know this.

Before you take any financing with a factor rate, calculate the true APR. You might find that "expensive" traditional financing at 15-20% APR is actually much cheaper than "affordable" factor-rate products.