What Is Money Factor?

Money factor is a method for determining the financing charges on a lease with monthly payments. A money factor can be translated into the more common annual percentage rate (APR) by multiplying the money factor by 2,400.

Money factor is also known as a "lease factor," "lease fee," or "lease money factor."

How the Money Factor Is Used

An individual who takes out a lease on a car pays for the amount by which the value of the vehicle depreciates during the time he is in possession of it. The monthly lease payments made on the car include depreciation, taxes, and interest. If the car is expected to depreciate in value by $5,000 annually, this amount will be factored into the monthly payments. Sales taxes are charged on both depreciation and interest and are included in the monthly payments of the lessee.

To determine the interest portion of monthly lease payments, the money factor is used. In effect, the money factor is the interest rate that is paid for the duration of a lease term. It is similar to the interest rate paid on a loan, but the value of the money factor is expressed differently.

Unlike APR, which is expressed as a percentage, the money factor is expressed in a decimal format. Either way, the interest rate and money factor can be obtained by contacting the car dealer or checking with the credit union.

Calculating the Money Factor

The money factor can be calculated in two ways. One method relies on knowing the APR of the lease, while the other method requires leasing information such as payments, residual value, and the duration of the lease.

APR Method

First, the money factor can be converted to the equivalent APR by multiplying by 2,400. In the same vein, if the car dealer uses an interest rate, this can be converted to a money factor by dividing by 2,400. For example, if quoted a money factor of .002, the interest rate on that loan would be approximately (0.002) x 2,400 = 4.8%. Likewise, if the car dealer quotes a lease APR of 4.8%, a lessee can figure out the money factor of .002 by dividing the APR by 2,400.

Leasing Information Method

The second method of calculating the money factor is using the lease charge. If instead of an interest rate, the car dealer quotes a lease charge, the money factor can be calculated as:

Money Factor = Lease Charge / (Capitalized Cost + Residual Value) * Lease Term

The lease charge of this formula is the sum of all future monthly finance costs over the entire life of the lease. The capitalized cost is the agreed-upon cost you agree to pay for the vehicle, while the residual value is the agreed-upon value of the vehicle at the end of the lease. The lease term is expressed as the total number of months of the lease.

Special Considerations

A money factor may also be presented as a factor of 1,000, such as 2.0 rather than .002. While the decimal version is more common, a money factor that is a whole number can still be converted to an APR by multiplying it by 2.4. For example, a money factor of 2.0 translates to an APR of 4.8% when the money factor is multiplied by 2.4.

In addition to being determined by the borrower's credit history, the money factor is also affected by the financing company's rates as well as the dealer's markup. The money factor for a lease has historically been comparable to the national average for new car loans.