What Is Money Factor?

What Is Money Factor?

Let me explain what money factor is—it's a way to figure out the financing charges on a lease that involves monthly payments. You can convert a money factor into the annual percentage rate, or APR, that you're more familiar with, by multiplying it by 2,400.

People also call it a 'lease factor,' 'lease fee,' or 'lease money factor.'

Key Takeaways

The money factor is the financing charge you'll pay on a lease. It's like the interest rate on a loan, and it depends on your credit score. You'll see it as a very small decimal, starting in the thousandths place, like 0.00 something. If you multiply the money factor by 2,400, you get the equivalent APR. A lower money factor is better for you, and you can negotiate it.

How the Money Factor Is Used

When you lease a car, you're paying for how much the vehicle's value drops while you have it. Your monthly lease payments cover depreciation, taxes, and interest. For instance, if the car depreciates by $5,000 a year, that gets built into your payments. Sales taxes apply to both the depreciation and the interest, and they're part of what you pay each month.

To find the interest part of those monthly payments, you use the money factor. Essentially, it's the interest rate for the lease period. It's similar to a loan's interest rate, but it's shown as a decimal instead of a percentage. You can get the interest rate or money factor from the car dealer or your credit union.

Important Note on Credit Score

Your money factor comes directly from your credit score. A higher credit score means a lower money factor on your lease, and the opposite is true if your score is lower.

Calculating the Money Factor

You can calculate the money factor in two main ways. One uses the APR of the lease, and the other needs details like payments, residual value, and lease duration.

APR Method

To convert the money factor to APR, multiply by 2,400. If the dealer gives you an interest rate, divide it by 2,400 to get the money factor. For example, a money factor of 0.002 times 2,400 equals about 4.8% APR. Or, if they quote 4.8% APR, divide by 2,400 to get 0.002 as the money factor.

Leasing Information Method

If the dealer quotes a lease charge instead of an interest rate, calculate the money factor like this: Money Factor = Lease Charge / (Capitalized Cost + Residual Value) * Lease Term. The lease charge is the total of all future monthly finance costs over the lease. Capitalized cost is what you agree to pay for the vehicle, residual value is its value at lease end, and lease term is the number of months.

Special Considerations

Sometimes the money factor shows up as a factor of 1,000, like 2.0 instead of 0.002. You can still convert that to APR by multiplying by 2.4—for 2.0, that's 4.8% APR. Remember, that 2.0 isn't the APR; the money factor is always lower than the APR, even as a whole number.

Besides your credit history, the money factor depends on the financing company's rates and the dealer's markup. Historically, it's been similar to the average rate for new car loans nationwide.

What Is a Good Money Factor?

The money factor assesses interest on a lease, so lower is better because it means lower charges. What counts as good depends on your credit and market conditions, but something like 0.0025 or below equals about 6% APR, which is fairly good.

How Is Money Factor Calculated?

You have options for calculating it. Multiply by 2,400 to get APR, or use this formula: Money Factor = Lease Charge / (Capitalized Cost + Residual Value) * Lease Term.

Can You Negotiate Money Factor?

Whether you can negotiate depends on the dealer. Some say it's not negotiable, but others will adjust it to match current market rates.

What Is a High Money Factor?

Everyone has their own view on what's high, but generally, 0.0035 or more means at least 8.4% APR, which many would call high.

Is Money Factor Based on Credit?

Yes, your money factor is mostly based on your credit score. Higher scores get you lower factors, while lower scores mean higher ones.