Although it may seem complicated and daunting, the money factor is quite simple and by the time you finish reading this, you will be an expert too. Since cars can lose so much value in their lifetime, mastering the money factor will prove useful for this big money investment.
Money Factor Video Summary:
What is the Money Factor on a Car Lease? Why Do We Use It?
The phrase “money factor” almost sounds like it should be the name of a bad game show. However, knowing all about the money factor can be extremely beneficial for your wallet.
Knowing all useful terms and being able to run a simple calculation can clarify many things in what can be a confusing process. Knowing how to use the money factor can help you to make important decisions.
First and foremost, the term “money factor” is just a different, fancy way of saying interest rate. This could be where many begin to experience confusion. It is used because it is easier and quicker for calculating car leasing. Money factor is used to easily show monthly interest on monthly car payments.
You can easily translate between your interest rate and the money factor depending on what you need to calculate or evaluate. How to do this is explained further on in this article.
If you’ve decided leasing may be a good option for you. Or, if you have already entered into a lease or began the process, you can easily navigate this new process with ease by understanding money factor.
The money factor is unique in a few different ways:
- Extremely useful for evaluating car loans.
- It is also referred to as “lease factor” or “lease fee”
- It is not required by law to be included in your lease contract.
- It is a non-negotiable value.
- It is dependent upon many other values and influences.
In leasing a vehicle, you pay for the difference of the amount that the car depreciates for your lease term. Money factor is used to calculate your interest that results in the total calculation for your monthly payments on the vehicle.
Think of it like this: money factor is simply an extra measurement that is useful and common for calculating vehicle leases and interest rates.
Money Factor and Residual Value
Residual Value is simply another term for how much your car will be worth at the end of your lease. This is also called the salvage value.
Cars lose so much value over the course of their use, especially if you are buying brand new. The higher the residual value, the better. This is something that you should absolutely strive for.
For example, you will purchase a car at a retail value (MSRP) of $40,000. However, the estimated residual value at the end of your lease could be estimated as $20,000.
If your lease term is longer, your residual value may be lower. However, if your lease term is shorter, your car will likely still have a higher residual value.
What is a Good Money Factor?
When looking at money factor, the lower the better. You want a low money factor because in the end, you will be paying less compared to a higher one. Coming out of the lease, you want the best bang for your buck. This can be translated to having a good ending car price after the lease, or a residual value.
Your money factor should generally be lower than .0017. You generally want to make sure that the value is at or lower than the national average money factor or APR. The interest rate, money factor, or APR for your loan is usually based upon your specific circumstances like your credit score, loan length, and the cost of the car you are buying. If you have bad credit, this will result in a higher money factor, or interest rate. In an average loan, you will be paying the difference between the interest payments and the value of the car at retail price. Overall, the lower the money factor, the less you will be paying.
How to Calculate Money Factor
The money factor is not as difficult to calculate as you may think! Although your own personal values will be unique, there is a standard formula to calculate your unique money value.
This is the easy formula that can be used to calculate your money factor:
Money Factor = lease charge / term / (net capital cost + residual value)
Important values and what they mean:
Lease charge: total of finance fees over your entire lease
Term: how long your lease lasts
Net capital cost: the price for your vehicle
Residual value: the projected value of your car at the end of your lease
Using this formula, you can plug the values in from your lease contract to find your money factor. Calculating the money factor can be useful if your monthly payments fluctuate due to residual value. /
How to Convert Money Factor to Interest Rate/APR and Back
This quick trick makes it very easy to translate between interest and money factor. Leases do not usually contain a money factor value. However, you can calculate money factor simply using your interest rate.
The simple conversion is:
If you are looking to calculate for interest rate: multiply the money factor by 2,400.
If you are looking to calculate for money factor (from an interest rate): divide the interest rate by 2,400.
The easy number 2,400 always stays the same in this conversion. All you need to remember is which one to multiply or divide for and you are set!
The term money factor can come as a confusing curveball in an already stressful leasing process.
Many different questions can arise when leasing a car that can leave the buyer confused.
Should I have a higher or lower money factor? Do I need a higher credit score? Is my residual value good?
There can also be so many different terms, numbers, and percentages thrown out when entering a contract. This can be especially daunting for someone who has never completed the process before or may not have ventured into it in a long time.
Knowing terms like residual value, lease charge, term, capital cost, and money factor are important, but can seem time-consuming.
However, dedicating just a fraction of time to learning the differences between all the terms and using some quick calculations, you can better understand your lease and it will leave you coming out on top of the entire process.
If you enjoyed this article, be sure to check out our most recent article on Luxury Leases!