What is the 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. Multiplying the money factor by 2,400 will give the equivalent annual percentage rate (APR).
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.
It should be noted that the money factor can be hard to understand because of the convention. The money factor is also known as the lease fee, lease factor, or factor. Furthermore, it holds that the larger the money factor on a lease, the larger the total lease payment will be in a month.
Another way to think of the money factor is the cost of borrowing. It is essentially the return that the lessor expects on the lease they are extending to the lessee.
Money factor is also known as a “lease factor,” “lease fee,” or “lease money factor.”
Why is Money Factor Important?
A lower interest rate always results in a lower monthly car payment. As you can see from our example above, however, the interest portion on a lease is a relatively small portion of the lease payment. The larger chunk of the your car lease payment is based on your car depreciation expense which is the difference between your car’s capitalized cost and its residual value at the end of the lease term.
Can You Negotiate the Money Factor?
The money factor, like the residual value, is subject to the terms of the bank and their discretion. While you cannot directly negotiate the money factor, is in your dealer’s best interest to work with the bank that will make your desired monthly payment possible.
A good lease deal is based on a low average car payment. Getting a reasonable interest rate only represents about 1/3rd of the challenge in bringing down those monthly payments. There is nothing wrong, however, with asking your dealer for the money factor.
How to Calculate the Money Factor
The money factor is typically provided by a car dealership or bank in a car lease; however, it is useful to understand how it is calculated. Below is the formula to calculate the money factor:
Money Factor = Sum of Monthly Finance Fees / (Capitalized Cost + Residual Value) * Lease Term
Sum of Monthly Finance Fees – Also known as the sum of lease charge, it is the sum of all of the monthly financing over the entire term of the lease.
Lease Price – The price for the lease; commonly, the price for the leased car.
Residual Value – The value of the asset after lease; typically, the value of the car after lease.
Lease Term – In months, the length of the lease.
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.
Money Factor Intuition
To achieve a lower money factor in a car lease, it is important to demonstrate a strong credit history. It can help to decrease the monthly finance fees. Also, if the car’s residual value is high, it will also decrease the money factor.
It should be noted that car lease consumers should be aware of how the money factor can impact them financially and also understand the quoting convention of the money factor to not be misled.