The money factor is the fee a leasing agency charges a consumer to finance a monthly lease payment. The number is used by the agency to determine the rent-charge portion of the monthly payment, which is the portion not depreciated or amortized.
Knowing the ins and outs of the money factor can aid consumers who seek to lease a car or truck on a monthly payment schedule.
Definition and Examples of the Money Factor
The money factor is a fee factored into the overall monthly payment you’ll make on a new or used vehicle lease. In other words, it is the lease payment of your vehicle represented as a percentage of the vehicle’s total cost.
“When a person leases a car, he or she pays for the amount by which the vehicle's value depreciates during the period he or she owns it,” Imani Francies, a loan expert with US Insurance Agents, told The Balance in an email. “Depreciation, taxes, and interest are all included in the monthly leasing payments.”
Although the money factor is similar to the interest paid on loans, it may not appear on a lease agreement. Unlike an annual percentage rate (APR), which is required by law to be disclosed to a consumer obtaining a loan, a leasing agent has no legal obligation to reveal or explain the money factor to the consumer, Francies said.
“Most dealers won't tell you until you ask—and most customers aren't aware that they should—but it's crucial information since it plays a major role in calculating your monthly payments,” Francies said.
If the money factor does appear on your lease paperwork, it will often be in decimal form rather than as a percentage.
So what should a consumer know about the money factor? A good start is to compare the money factor to interest rates for auto loans.
“The money factor should be comparable to, if not lower than, national new-car loan interest rates when converted to APR,” Francies said. “The smaller the money component, the cheaper your monthly lease payments and the lower your overall financing costs.”
- Alternate names: Lease fee, lease factor
How the Money Factor Works
“The money factor is determined by the customer's credit score,” Francies said, which is a good reason to check your credit score regularly. It is also affected by the rate set by the bank or financing company, as well as the dealer’s commission markup, also known as the “buy/sell rate.”
The money factor is calculated with a general formula:
Money Factor = Lease Charge / (Capitalized Cost + Residual Value) * Lease Term
The money factor can be converted into an interest rate by multiplying it by 2,400. Conversely, if you know the APR, then you can divide it by 2,400 to arrive at the money factor.
Let’s say you want to lease a used sport utility vehicle for three years, and the car dealer or leasing agent agrees to a $45,000 price. At the end of the lease, the vehicle is worth $15,000, and you paid $7,000 in finance charges over the life of the lease.
The money factor equals $7,000 divided by $45,000 plus $15,000 multiplied by 36. That’s the finance charge divided by the capitalized cost, plus the residual value multiplied by the number of months the vehicle was leased.
The equation looks like this:
Money Factor = $7,000 / ($45,000 + $15,000) * 36
That means the money factor in this case is 0.0032407.
To convert that number into an APR, multiply it by 2,400.
The APR is 7.78%.
Being able to calculate the money factor will help you understand how car dealers and leasing agents arrive at the APR. The more you know about how the numbers come together when considering an auto lease, the better prepared you’ll be to make sound financial decisions that fit your needs.
- The money factor is the cost a consumer pays to finance a monthly lease payment.
- Unlike loan interest, leasing agents are not required to disclose the money factor, although it is calculated in your payment.
- The money factor is determined by the bank or lending agency, a consumer’s credit score and history, and the commission markup of the leasing agent.
- The money factor is converted to APR by multiplying it by 2,400.
- The money factor should be comparable to or lower than a new-car-loan interest rate.