What is the Lease Money Factor?
The money factor is one of the many numbers you need to be aware of when leasing a car. It’s essentially the interest rate you pay to lease a vehicle.
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If you decide to lease a car, there are several line items you should pay close attention to in the lease agreement. One of them is the lease money factor. This very important number will affect your monthly payments, so you'll want to understand what it is before you sign a car lease. Here are the key details.
What is the Lease Money Factor?
The lease money factor or lease fee is essentially the interest rate you pay to lease a vehicle. Similar to how a lender charges interest on a mortgage, a car dealership or finance company will apply a money factor to a lease. Including taxes and residual value, this number will account for a portion of your monthly lease payments.
Within a lease agreement, this number is represented in decimal form — for example, 0.0010 or 0.0025. This can make it difficult for the average consumer to understand what it means financially. To convert the money factor into a digestible number like the interest or annual percentage rate (APR) you'll pay, multiply it by 2,400.
For example, if the money factor in your lease agreement is 0.0010, when you multiply this figure by 2,400 you'll get an APR of 2.4%.
How Dealers Calculate the Lease Money Factor
A dealer or financing company will set the money factor based on a combination of the vehicle's lease term, lease charge, capitalized cost, and residual value. Here's what each of these terms means and how to use them to make the calculation yourself:
- Lease Term — this is the length of time that you'll rent the vehicle
- Lease Charge — this charge is the overall total of all monthly finance fees the dealer will charge over the lease term
- Capitalized Cost — this is the negotiated price of the car at the beginning of the lease term, plus any additional administrative fees the dealer may charge, any down payments, rebates, or trade-in value that may be applied to the lease to reduce your borrowing costs
- Residual Value — this is the vehicle's estimated value at the end of your lease, factoring in depreciation
The typical formula dealers use to calculate the lease money factor is:
Money Factor = Lease Charge / (Capitalized Cost + Residual Value) x Lease Term
If the money factor isn't clearly outlined in your lease, you can use this formula to calculate the number. Look through your lease documents or ask the dealer or lender to provide the necessary details for the car.
Can You Reduce the Lease Money Factor?
The lower the money factor, the less interest you'll pay over your lease term. Generally, a money factor of 0.0025 and below (the equivalent of 6% APR) is considered a good rate.
So how do you get a good interest rate when you lease a vehicle? The same way you do when borrowing for any other reason, whether it's buying a home or applying for a personal loan: by having good credit. This may reduce your interest rate because you'll represent a lower risk to a lender.
A high residual value on the car could also help you get a better interest rate. A higher residual value means you'd have lower monthly payments because there would be less depreciation on the vehicle. Since interest is applied to your monthly payment, a lower monthly payment would equate to reduced interest charges.
Understanding the Financial Implications
The money factor is one of the many numbers you may want to learn about when leasing a car. It's one of the transactional costs that come with leasing, and allows dealers and finance companies to make a profit on every lease they execute. As a consumer, it's a smart idea to learn the financial implications of this number and how it'll affect your overall costs over the course of a multi-year lease.
If the interest rate is too high, you may need to shop around for a better rate, negotiate with the dealer or lender to lower the money factor, or consider leasing another vehicle that's more in line with your budget. Either way, make sure you explore all your financial options before taking a car off the lot.
