Money factor is a pivotal element in determining financing charges on a lease with monthly payments. It can be converted into the more familiar annual percentage rate (APR) by multiplying the money factor by 2,400.
Money factor is also called “lease factor,” “lease fee,” or “lease money factor.” Let’s explore how it works and why it matters.
Key Takeaways
- Core Concept: Money factor represents the financing charge on a lease, akin to the interest rate on a loan.
- Credit Score Impact: It hinges on the customer’s credit score; a higher score means a lower money factor.
- Fractional Value: Usually expressed as a tiny decimal starting from the thousandth place (e.g., 0.00#).
- APR Conversion: Multiply the money factor by 2,400 to get the equivalent APR.
- Negotiation Potential: A lower money factor can be favorable, and it is often negotiable.
How the Money Factor Is Used
When leasing a car, the lessee pays for the vehicle’s depreciation during the lease period, along with taxes and interest. If a vehicle depreciates by $5,000 annually, this amount is folded into the monthly payments along with sales taxes on both depreciation and interest.
Essentially, the money factor determines the interest component of your monthly lease payments. This rate can be obtained from the car dealer or a credit union.
Note: The money factor depends directly on your credit score. Higher credit scores result in lower money factors and vice versa.
Calculating the Money Factor
There are two principal methods to calculate the money factor: through the APR or directly from leasing information.
APR Method
To translate the money factor into APR, multiply by 2,400. Similarly, if given an APR, you can convert it into a money factor by dividing by 2,400.
Example:
If quoted a money factor of 0.002, the interest rate would be approximately (0.002) x 2,400 = 4.8%. Conversely, a 4.8% APR translates to a money factor of 0.002 (4.8 / 2,400).
Leasing Information Method
Alternatively, use the lease charge, capitalized cost, and residual value:
Money Factor = Lease Charge / (Capitalized Cost + Residual Value) \* Lease Term
Where:
- Lease Charge: Total of all future monthly finance costs.
- Capitalized Cost: Agreed total cost to be paid for the vehicle.
- Residual Value: Predetermined value of the vehicle at the lease’s end.
- Lease Term: Total number of months during the lease.
Important Considerations
Money factor may occasionally be presented as a factor of 1,000. For instance, 2.0 as opposed to 0.002. To find the APR, multiply it by 2.4. Therefore, 2.0 implies an APR of 4.8%, maintaining the decimal to whole number format.
Besides credit score, the financing company’s rates and dealer’s markup influence the money factor, which often parallels average new car loan rates.
What Is a Good Money Factor?
A lower money factor is preferable, implying lower finance charges. Generally, an acceptable money factor of 0.0025 or 25 and below correlates to an approximated 6% APR.
How Is Money Factor Calculated?
Multiple ways exist to compute the money factor:
- Multiply by 2,400 to convert it to an APR
- Utilize leasing metrics:
Money Factor = Lease Charge / (Capitalized Cost x Residual Value) \* Lease Term
Can You Negotiate Money Factor?
Negotiation depends on the dealer. Some may either rigidly set or be amenable to altering the money factor, typically adjusting according to current market interest rates.
What’s a High Money Factor?
Generally, a money factor above 0.0035 or 35 translates to an APR of 8.4% or higher, potentially viewed as costly.
Is Money Factor Based on Credit?
Absolutely. Your credit score significantly dictates your money factor: higher scores usually result in more favorable, lower money factors.
Related Terms: annual percentage rate, APR, residual value, lease term, credit history.
