What Is the Money Factor?
The money factor is a method for determining the financing charges on a lease with monthly payments. The 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" or a "lease fee."
- 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.
- Multiplying the money factor by 2,400 will give the equivalent annual percentage rate (APR).
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, a concept known as the money factor is used. In effect, it 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 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.
Firstly, 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 (.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 by dividing by 2,400.
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. Following the example above, the interest rate will be calculated as (2.0) x 2.4 = 4.8%. It is important to remember the 2.0 depicted above is not the APR on the lease.
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=(CC+RV)×LTLease Chargewhere:Lease Charge=sum of all a lessee’s monthly finance feesover entire term of the leaseCC=capitalized cost–the agreed price for a leased vehicle,also known as lease priceRV=residual value–value of car at end of leaseLT=lease term–length of time car is leased, in months
For example, a car has a sticker price of $32,500. A lessee and dealer negotiate and agree on a lower price of $30,000 for the leased car. The car is to be leased for four years (or 48 months), and has an estimated residual value of $15,000. The total monthly fees are $4,750. The monthly factor is, therefore:
Money Factor=($30,000+$15,000)×48$4,750Money Factor=$2,160,000$4,750Money Factor=$0.002199
The APR is, therefore, 0.002199 x 2,400 = 5.28%, and the monthly interest payment on the lease is ($30,000 + $15,000) x 0.002199 = $98.96 (which can be confirmed by the lease charge of $4,750 / 48 periods).
Money factors are used in cases where the monthly payments may fluctuate based on the residual value of an asset, such as an auto lease. In a typical lease, the investor is paying the difference between the retail value of the automobile and the interest payments.
The money factor, converted to APR, should be comparable to if not lower than national new-car loan interest rates. Like interest on a loan, the lower the money factor, the lower your monthly lease payments, and the less you will pay in total finance charges. While the conversion factor of 2,400 stays the same, the money factor depends on the lessee’s credit history. A poor credit history will result in a higher money factor.