What is the Money Factor?
The money factor is an alternative method of presenting the amount of interest charged 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."
Breaking Down Money Factor
An individual who takes out a lease on a car pays only for the amount by which the value of the vehicle depreciates during the time he drives it. The monthly 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.
The money factor determines how much interest payment is to be made monthly. In effect, it is the interest rate that is paid for the duration of a lease term. Unlike the annual percentage rate, 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.
Calculating the Money Factor
The money factor can be calculated in two ways. Firstly, the money factor can be converted to the interest rate 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 rate 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%.
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:
Where lease charge = sum of all a lessee’s monthly finance fees over the entire term of the lease
capitalized cost = the agreed price for a leased vehicle, also known as lease price
residual value = value of car at the end of the lease
lease term = the length of time a 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 = 0.002199
The interest rate is 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.
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.