What Is Money Factor?
Money factor is a method for determining the financing charges on a lease with monthly payments. A money factor can be translated into the more common annual percentage rate (APR) by multiplying the money factor by 2,400.
Money factor is also known as a "lease factor," "lease fee," or "lease money factor."
- The money factor is the financing charge a person will pay on a lease.
- It is similar to the interest rate paid on a loan, and it is also based on a customer's credit score.
- It is commonly depicted as a very small decimal that begins in the thousandth place (i.e., 0.00#).
- Multiplying the money factor by 2,400 will give the equivalent annual percentage rate (APR).
- A lower money factor is more favorable to a borrower, and the money factor can be negotiated.
How the Money Factor Is Used
An individual who takes out a lease on a car pays for the amount by which the value of the vehicle depreciates during the time he is in possession of it. The monthly lease payments made on the car include depreciation, taxes, and interest. If the car is expected to depreciate in value by $5,000 annually, this amount will be factored into the monthly payments. Sales taxes are charged on both depreciation and interest and are included in the monthly payments of the lessee.
To determine the interest portion of monthly lease payments, the money factor is used. In effect, the money factor is the interest rate that is paid for the duration of a lease term. It is similar to the interest rate paid on a loan, but the value of the money factor is expressed differently.
Unlike APR, which is expressed as a percentage, the money factor is expressed in a decimal format. Either way, the interest rate and money factor can be obtained by contacting the car dealer or checking with the credit union.
The money factor is directly determined by a customer's credit score. The higher the credit score, the lower the money factor on a lease, and vice versa.
Calculating the Money Factor
The money factor can be calculated in two ways. One method relies on knowing the APR of the lease, while the other method requires leasing information such as payments, residual value, and the duration of the lease.
First, the money factor can be converted to the equivalent APR by multiplying by 2,400. In the same vein, if the car dealer uses an interest rate, this can be converted to a money factor by dividing by 2,400.
For example, if quoted a money factor of .002, the interest rate on that loan would be approximately (0.002) x 2,400 = 4.8%. Likewise, if the car dealer quotes a lease APR of 4.8%, a lessee can figure out the money factor of .002 by dividing the APR by 2,400.
Leasing Information Method
The second method of calculating the money factor is using the lease charge. If instead of an interest rate, the car dealer quotes a lease charge, the money factor can be calculated as:
Money Factor = Lease Charge / (Capitalized Cost + Residual Value) * Lease Term
The lease charge of this formula is the sum of all future monthly finance costs over the entire life of the lease. The capitalized cost is the agreed-upon cost you agree to pay for the vehicle, while the residual value is the agreed-upon value of the vehicle at the end of the lease. The lease term is expressed as the total number of months of the lease.
A money factor may also be presented as a factor of 1,000, such as 2.0 rather than .002. While the decimal version is more common, a money factor that is a whole number can still be converted to an APR by multiplying it by 2.4. For example, a money factor of 2.0 translates to an APR of 4.8% when the money factor is multiplied by 2.4.
It is important to remember the 2.0 figure depicted above is not the APR on the lease. The money factor will always be lower than the APR, even when displayed as an integer greater than 1.
In addition to being determined by the borrower's credit history, the money factor is also affected by the financing company's rates as well as the dealer's markup. The money factor for a lease has historically been comparable to the national average for new car loans.
What Is a Good Money Factor?
The money factor is the interest assessment on a lease. For this reason, a lower money factor is more favorable to a borrower as it signifies a lower financing charge. A good money factor will largely depend on borrower credit and prevailing market conditions, but a fairly good money factor of 25 (0.0025) and below translates to an imposed 6% APR.
How Is Money Factor Calculated?
There are several ways to calculate the money factor. First, the money factor can be multiplied by 2,400 to arrive at an APR. Alternatively, the formula below can be used as a substitute:
- Money Factor = Lease Charge / (Capitalized Cost * Residual Value) * Lease Term
Can You Negotiate Money Factor?
The negotiability of the money depends on the dealer. Some dealers may explicitly state the money factor is not negotiable, while others are open to negotiating the money factor to align to current market interest rates.
What Is a High Money Factor?
Each borrower will have their own opinion regarding what constitutes a high money factor. In general, a money factor of at least 35 (0.0035) translates to at least an 8.4% APR. For many, a money factor of at least 35 would be considered high.
Is Money Factor Based on Credit?
A borrower's money factor is largely based on the borrower's credit score. Borrowers with higher credit scores will often have a lower money factor on a lease, while lower credit borrowers will have higher money factors.