2027 CLFP Recertification

Pricing in the equipment leasing and finance industry relies on a set of related but distinct terms used to measure, communicate, and evaluate transaction economics. While interconnected, each concept serves a specific purpose depending on whether the focus is deal structuring, profitability analysis, accounting treatment, or customer communication.

Yield

Yield is a general term used to describe the annualized rate of return derived from a transaction’s cash flows. In leasing, yield may incorporate lease payments, upfront fees, residual value, and, in certain structures, tax benefits. Yield is often used internally as a shorthand measure of deal profitability; however, there is no single universal yield calculation. The methodology and assumptions used such as pre tax versus after tax treatment or inclusion of fees must be clearly understood when comparing yields across transactions.

Implicit Rate

The implicit rate is the interest rate implied by the lease structure, calculated as the rate that equates the present value of lease payments and any residual value to the asset’s fair value at lease inception and presented as an annual percentage rate (APR). The implicit rate reflects the effective financing rate embedded in the lease, even if it is not explicitly disclosed to the customer. This concept is commonly used in lease accounting and financial analysis to assess the economic cost of leasing.

Running Rate / Stream Rate

Running rate, also known as stream rate, is a simplified annual percentage measure calculated by dividing total finance charges by the average outstanding investment over the life of the lease. While easy to calculate and communicate, the running rate does not fully account for the time value of money. As a result, it generally understates the economic return compared to time value based measures such as yield or internal rate of return. Running rates are typically used for high level comparisons rather than formal deal evaluation.

Lease Rate or Lease Rate Factor

The lease rate factor is a multiplier used to calculate periodic lease payments, typically expressed as a decimal (for example, 0.025). It is applied to the equipment cost to determine the payment amount. Lease rate factors are useful for quoting and structuring transactions but are not measures of return. To properly evaluate profitability, lease rate factors must be converted into a yield or IRR.

Discount Rate

The discount rate is the rate used to determine the present value of future cash flows. In leasing, it often represents the lessor’s cost of funds or required rate of return. Discount rates are critical in evaluating residual values, comparing alternative deal structures, and determining whether a transaction meets internal return thresholds.

Internal Rate of Return (IRR)

Internal Rate of Return (IRR), also known as the discounted cash flow rate of return, is a widely accepted measure of return in leasing and finance and is the most common method used to compute yields. IRR is defined as the annualized rate at which the net present value (NPV) of all transaction cash flows equals zero. Because IRR fully accounts for the timing and magnitude of cash flows, it is particularly useful for comparing transactions with different terms, structures, or residual assumptions.

Points and Basis Points

A point equals one percent (1.00%), while a basis point equals one hundredth of one percent (0.01%). Points are used to represent a percentage of commission to be paid to a broker, originator, or seller of a transaction while basis points are commonly used to describe small changes in rates or yields to avoid ambiguity.

Lease Rate Factors

Lease Rate Factors (LRF) are a tool to easily calculate lease pricing and are commonly used in program relationships to allow outside individuals access to payments by multiplying the finance cost by the LRF. This is expressed as a percentage of the cost and calculated by dividing the monthly payment by the equipment cost.

Summary

A clear understanding of these pricing terms—and the assumptions underlying them—is essential for consistent deal structuring, accurate profitability analysis, and effective communication across sales, credit, accounting, and executive stakeholders.