Key Takeaways
- Money factor is lease interest rate in decimal form.
- Higher money factor increases monthly lease payments.
- Multiply by 2400 to find equivalent APR.
- Used mainly for car and equipment leases.
What is Money Factor?
The money factor is the financing charge component in a lease, often expressed as a small decimal (e.g., 0.00125) that determines how much interest you pay monthly on a leased asset. It is commonly used in vehicle or equipment leases instead of traditional interest rates, linking closely to the factor concept in finance.
This rate reflects your borrowing cost embedded within lease payments, helping you compare lease offers more effectively than relying on nominal percentages.
Key Characteristics
Understanding the money factor’s main features helps you negotiate better lease terms.
- Decimal Format: Unlike APR percentages, the money factor is shown as a small decimal for easier calculation of monthly finance charges.
- Lease-Specific: Primarily applied to leases rather than loans, it factors into payments alongside depreciation and taxes.
- Credit Impact: Your credit score influences the money factor; better credit typically results in a lower factor and reduced financing costs.
- Conversion to APR: Multiply the money factor by 2400 to estimate its equivalent annual percentage rate, aiding comparisons with loan interest.
- Negotiable: Dealers can markup the base money factor from captive lenders, so it’s beneficial to negotiate this component.
How It Works
The money factor calculates the monthly finance charge based on the sum of the capitalized cost and residual value of the leased asset. You multiply the money factor by this total to find the interest portion included in your monthly payment.
For example, if you lease a car with a capitalized cost of $50,000 and a residual value of $10,000, and the money factor is 0.00278, your monthly finance charge is approximately $167. This method differs from traditional loans by incorporating the asset’s expected depreciation.
Examples and Use Cases
Money factors are most commonly applied in auto leases but also extend to equipment leasing and other asset rentals.
- Auto Leasing: When leasing vehicles from manufacturers like Delta or financing with competitive credit, understanding the money factor helps you evaluate total costs.
- Credit Cards Comparison: If you’re exploring financing options beyond leasing, check out our guide on the best low interest credit cards to manage borrowing costs effectively.
- Economic Influence: The macroeconomic factor affects prevailing money factors, as broader economic conditions influence lending rates and lease pricing.
Important Considerations
Always scrutinize the money factor quoted by dealers, as a seemingly low number can be marked up significantly. Comparing the money factor’s equivalent APR to loan rates offers insight but remember that leases differ due to the inclusion of residual value calculations.
Evaluating the money factor alongside other lease components like depreciation and taxes ensures you understand your full payment obligation. For credit-conscious consumers, reviewing the best credit cards for excellent credit can complement your leasing strategy by reducing overall financing expenses.
Final Words
A lower money factor reduces your monthly lease financing costs, so always ask to see it when comparing lease offers. Run the numbers using the capitalized cost and residual value to ensure you’re not overpaying on interest before signing.
Frequently Asked Questions
Money factor is the financing charge or interest rate component in a vehicle or equipment lease, expressed as a small decimal. It determines the portion of your monthly lease payments allocated to borrowing costs.
A higher money factor increases the total lease payments because it raises the interest portion you pay monthly. It depends on factors like your credit score and current economic conditions.
You can calculate money factor by dividing the total lease finance charge by the product of the sum of capitalized cost and residual value multiplied by the lease term in months. This formula helps determine the decimal rate used in your lease payments.
Yes, multiply the money factor by 2400 to get an equivalent APR percentage. This conversion helps compare lease interest rates to traditional loan APRs.
Money factor is expressed as a decimal for simpler math when calculating lease payments, allowing direct multiplication with the sum of the vehicle's capitalized cost and residual value.
Yes, dealers may mark up the base 'buy rate' money factor, especially with captive lenders, so you can negotiate to lower it to reduce your financing costs.
Your monthly lease payment includes depreciation (vehicle value loss), taxes, and financing charges, which come from the money factor.
