Factor Rate vs Interest Rate: What's the Difference?
The core of factor rate vs interest rate is this: a factor rate is a fixed multiplier that never changes, while an interest rate accrues on your balance and falls as you repay. A 1.40 factor rate on a $100,000 advance is a flat $40,000 cost — about a 95% effective APR over roughly 9 months.
An interest rate does the opposite: it charges you only on the money you still owe, so the cost drops as the balance shrinks. That single difference is why a factor rate can cost far more than its number suggests.
Factor Rate vs Interest Rate (APR): Side-by-Side
| Factor Rate | Interest Rate (APR) | |
|---|---|---|
| What it is | A fixed multiplier (e.g. 1.40) | A percentage charged on the balance |
| How cost is set | Locked at signing — never changes | Accrues over time on what you still owe |
| Cost on $100,000 | 1.40 factor = $40,000 fixed fee | Depends on rate, balance, and term |
| Illustrative effective APR | ~95% (1.40 factor over ~9 months) | Stated directly (e.g. 10% APR = 10%) |
| Effect of paying early | No savings — fee is fixed | Saves money — less interest accrues |
| Where you see it | MCAs, some short-term advances | Bank loans, SBA loans, lines of credit |
| Easy to compare? | No — must convert to APR | Yes — APR is standardized |
Which should you choose?
An interest rate (APR) is the honest, comparable number; a factor rate is not. Always convert a factor rate to an effective APR before you sign, because a 1.40 factor can equal roughly 95% APR — several times higher than most loans.
If a lender only quotes a factor rate and refuses an APR, treat that as a warning sign.
A factor rate is a fixed multiplier that never shrinks
A factor rate is a flat multiplier applied once, at signing. A 1.40 factor on $100,000 means you owe $140,000 — a $40,000 fee that does not change no matter how you repay. The Federal Reserve notes that merchant cash advance providers typically charge a factor rate and often do not express the cost as an APR at all. That makes the price look small when it is not. Convert it with our factor rate calculator.
An interest rate accrues on your balance and falls as you repay
An interest rate charges you only on the money you still owe. As you pay down the balance, the interest you owe each period drops. That is why a 10% APR loan really costs about 10% a year — the number is standardized and comparable. A factor rate ignores this entirely, charging the full fee up front regardless of your payment speed. See how balances shrink on a business line of credit.
The same money can cost wildly different amounts
A factor rate and an interest rate can describe the same dollars at very different true prices. A 1.40 factor on $100,000 repaid over about 9 months is a fixed $40,000 fee — roughly a 95% effective APR. A bank loan for the same amount might charge 10% APR and cost a few thousand dollars over a year. The factor rate's flat fee, collected through fast daily holdbacks, is what pushes the effective APR so high. Model an advance with our merchant cash advance calculator.
Non-obvious insight: a shorter term makes a factor rate worse
With a factor rate, paying faster raises your effective APR — the opposite of a loan. Because the $40,000 fee is fixed, repaying it in 6 months instead of 9 crams the same cost into less time, so the annualized rate climbs. With an interest rate, a shorter term means less total interest. This is the trap in factor-rate pricing: the 'good' behavior of paying early costs you nothing back and can make the deal look even pricier when annualized.
Frequently asked questions
What is the difference between a factor rate vs interest rate?
A factor rate is a fixed multiplier set at signing that never changes, while an interest rate accrues on your balance and falls as you repay. A 1.40 factor on $100,000 is a flat $40,000 fee — about 95% effective APR over ~9 months.
How do I convert a factor rate to an APR?
Multiply the advance by the factor rate to get total repayment, subtract the advance to find the fee, then annualize that fee over the real repayment term. A 1.40 factor over about 9 months is roughly 95% APR. Our factor rate calculator does the math for you.
Why do lenders quote a factor rate instead of an APR?
A factor rate makes the cost look small. A 1.40 factor reads as a modest number, but it can equal roughly 95% APR. The Federal Reserve notes MCA providers often skip the APR entirely, which makes comparison shopping harder.
Does paying off a factor-rate advance early save money?
No. The fee set by the factor rate is fixed, so paying early saves nothing and actually raises your effective APR. With an interest rate, paying early cuts total interest because it accrues on the remaining balance.
Free calculators to help you decide
Sources
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