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 the money factor is directly determined by a customer s credit score the higher the credit score the lower the money factor on a lease and vice versa calculating the money factorthe 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 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 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 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 considerationsa 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 it is important to remember the 2 0 figure depicted above is not the apr on the lease the money factor will always be lower than the apr even when displayed as an integer greater than 1 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 