Understanding Simple Interest vs. Rate vs. APR in Equipment Financing

   When you're evaluating equipment financing offers, terms like simple interest, rate, and APR get thrown around a lot. And if you've ever walked away from a loan agreement wondering what did I actually pay in interest?—you’re not alone.

  In my experience the rate is just one factor and no matter how it is presented the most important thing to understand are the loan terms including the rate, fees, and prepayment options. I'll cover those in a later section.

  For now, Understanding the three most common ways interest is presented is a great place to start.

What is Simple Interest?

   Simple interest refers to the basic cost of borrowing money without compounding. It’s calculated using a formula:

   (Monthly Payment × Term in Months – Equipment Cost) ÷ Term in Years ÷ Equipment Cost

   Example: You're financing a $100,000 piece of equipment for 5 years (60 months) at 9.99% interest (not APR)

$2,124.21 (monthly payment) x 60 (term in months) = $127,452.60

$127,452.60 (total of payments) - $100,000 (equipment cost) = $27,452.60 (total interest)

$27,452.60 (total interest) ÷ 5 (term in years) = $5,490.52 (annual cost of funds)

$5,490.52 (annual cost of funds) ÷ $100,000 (equipment cost) = 5.49% (simple interest rate)

   This gives you a rough idea of how much interest you're paying over time, spread out annually, but it doesn't reflect amortization or fees.

What Is the "Rate"?

   The "rate" can mean a few things, but ultimately it is the percentage that you're being charged, but it doesn't reflect fees. It might look like:

   "your rate is 9.99%"

   But this figure is not necessarily an APR and doesn't have to includes other costs like documentation fees, origination charges, or prepayment penalties. It's best used as a basic comparison tool, but it's not the full picture.

  This can be double checked by plugging the terms you were told into basically any online calculator. I typically use Bankrate's calculator tool, but there are plenty out there.

What Is APR?

APR (Annual Percentage Rate) is the most standardized way to understand the true cost of borrowing. It includes:

• Interest

• Fees

• Any additional costs rolled into the loan

  
  

This makes APR the most whole metric when comparing financing offers side-by-side, but in the alternative lending space companies aren't always able to quote an APR.

Why This Matters in Equipment Financing

   In equipment finance, especially for small businesses, comparing offers can be confusing. Lenders may advertise low rates, but backload fees or use precomputed interest methods that favor the lender.

Make sure to:

• Review payments and terms side by side when comparing

• Read any agreements you are provided.

• Understand prepayment terms—some loans penalize early payoffs

• Understand any upfront fees

  
  

Bottom Line

  If you're considering equipment financing, it pays to ask the right questions. Don’t settle for vague numbers or confusing sales pitches.

   Want a second opinion on your offer? Brilliance Funding can help you decode your loan terms and make sure you’re getting the deal you think you are.

About the Author

   Jared Holmes is the founder of Brilliance Funding Partners, where he helps business owners navigate the commercial lending landscape with confidence. With 9 years of hands-on experience in SBA lending, equipment financing, and working capital solutions, Jared focuses on asking the right questions and delivering financing strategies that make sense for each business. Connect with Jared for a personalized conversation about your options.