A money factor or lease factor is a method of presenting the amount of interest on a lease that has monthly payments. Money factors are also known as monthly financial fees and are used in cases where payments may fluctuate based on the value of an asset, such as an auto lease. Typically, the investor is paying the difference between the retail value of the automobile and the interest payments. This factor can be translated into an annual percentage rate (APR) by multiplying the money factor by 2,400. If the lease factor is presented as a factor of 100, such as 2.0 instead of .002, it can still be converted into an APR by multiplying it by 24.
Consumers who don’t know about the money factor are easy targets for signing leasing contracts with high interest rates. There are three basic parts of an automobile lease. The gross capitalized cost is the price paid for the car. Residual value, the car's value when the lease ends, is the amount consumers would need to pay if they decide to keep leased cars. Finally, the money factor is the interest rate that has been built into the lease.
Money factors are used instead of an interest rate for a variety of reasons. When consumers lease automobiles, the lease payments have to cover the difference between the capitalized cost of the vehicle and its residual value. This means the consumer is paying for the difference in value between when he starts the lease and when he turns the car back in at the end of the lease.
The money factor is a number that calculates the interest expense associated with the lease; it is usually a long decimal number. Some consumers mistake it for the annual interest rate they will be paying. Multiplying the money factor by 2,400, when it is expressed in decimal form, will convert it into the interest rate. A money factor of .00208 would have an actual interest rate of about five percent. Choosing different lease lengths does not affect this formula.
Lease payments have to cover the interest expense associated with the leasing company loaning consumers the remaining negotiated capitalized cost of the car less any principal repayment over the lease term. If an interest rate is divided by 2400, a consumer knows the money factor on his lease. Money factors are used to calculate the size of lease payments just as interest rates are used to figure loan payments. Knowing what this factor is and how to convert it into an APR can make leasing an automobile a clear financial transaction.
