What is the Money Factor?
The money factor is the interest rate that is paid over the course of a car lease. It is similar to the interest paid for a car loan. It is expressed as a very small number (e.g. 0.00155). The figure can be converted to APR interest rate by multiplying by 2400. 2400 as a conversion factor remains constant. The money factor determines the financing charges to be made for the monthly payments made for a car lease.
The calculation for the interest on a lease is executed, using traditional APR and dividing it by 2400 to convert the figure to a decimal figure. The residual, net cap cost, and the price of the car are added then multiplied by the money factor . This means that the charge for the car is based on the price.
How to Treat Disclosure Rules and Depreciation
Lease money factor is not usually disclosed in a lease contract. Neither is it in lease advertisements or commercials. The dealer may provide the money factor. Individuals with a lease contract may calculate the money factor by dividing lease charge by the term (lease months) which is divided by the net cap cost plus residual value.
If one uses a car lease, they have to pay for the depreciation in the value of a vehicle while it is in their possession. Lease payments on the car include depreciation, taxes, and interest.
The higher the amount of depreciation, the higher the monthly payments may be. Sales tax is also included in monthly payments. Taxes may be charged on depreciation.
Credit history can have a significant effect on the money factor. Money factor may be higher for individuals with poor credit history. This presents higher monthly lease payments which can prove to be costly.
Most customers don’t usually discuss the money factor with car dealers. The law does not require that dealers discuss the money factor or disclose it in contracts. It helps to engage a dealer in conversation about the money factor to gain a better idea of nuances of the deal and monthly payments related to it.
It is important to pay attention to how the money factor is expressed. Without enough understanding of the figures, one could easily interpret a high money factor as low.
Although it is not often advertised, car companies may offer lower money factors through special limited-time lease deals. Such rates can be close to 0% equivalent APR.