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Understanding APR, Interest Rates, and Factor Rates
What each pricing method means, why a factor rate isn't an interest rate, and how to compare offers fairly.
Not yet reviewed
This guide is a draft awaiting factual and compliance review. It's for general education only and is not financial, legal, or tax advice.
Interest rate
An interest rate is the cost of borrowing expressed as a percentage of the outstanding balance, usually annually. As you pay down the balance on a traditional amortizing loan, the interest you pay each period decreases.
APR (annual percentage rate)
APR expresses the yearly cost of financing including interest and certain fees, which makes it more useful than the interest rate alone for comparing offers. Some states now require APR-style disclosures for certain commercial financing; requirements vary.
Factor rate
A factor rate is a multiplier, often shown as a decimal such as 1.20. You multiply it by the amount funded to find the total repayment. Unlike interest, the cost is fixed up front and doesn't decline as you pay down the balance.
Example: $50,000 × 1.20 = $60,000 total repayment, meaning $10,000 in financing cost. If that $60,000 is repaid over 6 months, the equivalent annualized cost is far higher than 20%. If it's repaid over 18 months, it is lower — the shorter the term, the higher the effective annual cost.
How to compare offers
- Ask for the total repayment amount for each offer
- Ask for the APR or an annualized cost estimate
- Note the term length and payment frequency (daily, weekly, monthly)
- List every fee: origination, underwriting, closing, and others
- Ask whether early repayment reduces the total cost
| Interest rate | APR | Factor rate | |
|---|---|---|---|
| Expressed as | % per year | % per year incl. certain fees | Multiplier (e.g. 1.20) |
| Cost changes as you repay? | Yes, on amortizing loans | Reflects full cost over term | No, fixed up front |
| Good for comparing offers? | Partially | Yes | Only alongside term length |
Frequently asked questions
Is a 1.2 factor rate the same as 20% interest?
No. A 1.2 factor rate means you repay 1.2 times the funded amount regardless of term. The equivalent annual cost depends on how quickly it's repaid and is usually higher than 20%.
Does paying early save money with a factor rate?
Often not, because the cost is fixed. Some funding sources offer early payoff discounts — ask before you sign.
Related financing
Want to talk through your situation? Speak with a specialist.