It’s important. It’s mathematical. It seems obscure and esoteric, but it has a very solid impact on your monthly payments for a car lease. It’s… the money factor!
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As a customer, you may not even be aware of the money factor, what it is or what it means for you. It’s often relegated to backstage in car lease negotiations, but if you’re looking to get a good deal on your lease, it’s time to bring it front and center.
Let’s meet the money factor, see how it influences your lease rates and what to do with it.
Money factor vs. interest rate: where do these numbers come from?
Money factor goes by several names: “lease factor,” “lease fee” or “lease rate.” But no matter how you call it, the money factor is a major player in determining your monthly lease payments.
It’s typically a very small percentage, though sometimes represented in a more readable form. For example, a money factor of 0.00285 might appear on a contract as 2.85. This can be confusing to lease customers, since it appears to be an interest rate.
Money factor is similar to the interest rate (technically known as the annual percentage rate or APR), but not the same.
You can calculate an interest rate from a money factor by multiplying the money factor by 2,400. (So in our example, the 2.85 money factor actually converts into a 6.84% interest rate!)
Why do these two rates exist, when they’re so similar?
The answer goes back to the days before computers and calculators on every smartphone, when lease calculations had to be done by hand. I won’t bore you with the math, but just to know the equation to calculate a lease payment is extremely complicated – much more than a similar equation for interest on a loan. It looks like this:
( ACC * (1 + r)^n – RV ) * r
P = ————————————
(1 + r)^n – 1
P = monthly payment
ACC = adjusted capitalized cost
r = monthly interest rate
n = number of payments
RV = residual value
Someone clever figured out that with leasing, you can come up with a number equivalent to the one generated by the equation, based on the relationship between the car’s residual value and the outstanding balance on the lease.
From this, you just have to multiply by 2,400 and you’re back at the APR.
As a customer, you don’t have to be a math whiz following all the gnarly equations and variables. However, you should be aware of what the numbers mean and how they affect you. Especially, don’t confuse the money factor with the interest rate!
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In both cases, a lower money factor or interest rate means lower monthly payments. Just check which one you are dealing with.
Unlike with loans, where the APR is required by law to be shown on the contract, the money factor will not appear on the lease contract. Dealers usually won’t disclose it unless you ask (and most customers don’t know to ask for it!) but it’s important information. If the dealer won’t share it when you ask, find a different dealer.
How the money factor affects your monthly payments
I mentioned already that the money factor is a big part in determining your monthly payments; possibly the most important element other than residual value.
As an example, let’s say you’re going to lease a car with $25,000 ACC and a residual value of $15,000, and you’re given a fairly average money factor of 0.0020.
To calculate the amount of monthly interest you will pay, add the ACC to the residual value then multiply the sum by the money factor: ($25,000+$15,000)*0.0020 = $80.
This is what you will pay just in interest, so add it to the other elements to get a complete monthly payment.
For quick reference:
• A very low money factor starts with a decimal followed by three zeros (eg. 0.0009).
• An average rate is a decimal point followed by two zeros and a 25 or less (0.0025 or below).
• A high rate is a decimal point followed by two zeros and anything above 35 (0.0035 and above).
The lowest example of a money rate I gave (0.0009) represents a 2.16% APR, while the highest (0.0035) is already up at 8.4%.
As you can see, the difference looks a bit more dramatic in APR form than money factor, so always do your multiplication by 2,400 to get a real sense of what you’re paying!
Can I negotiate the money factor on a car lease?
The money factor is one element of the lease that can’t really be negotiated. It’s set by the bank, which means it isn’t in the dealership’s hands to alter. However, you may be able to find a better deal by leasing a car through a bank that offers a lower rate.
There are a few factors that determine what money factor you are offered.
• Credit tier approval: As with any interest rate, better deals are typically offered to customers with higher credit scores, so bad credit can get you stuck with a high money factor.
• How you pay: One-pay leasing, an unconventional leasing strategy, actually cuts out the money factor altogether since you pay for the entire lease upfront. This plan only works if you have a huge chunk of money on hand, but it does save a lot of money over the course of the lease.
• Security deposits: Giving multiple security deposits can help you score a lower money factor. (Not down-payment, however: this doesn’t affect the money factor.)
Credit approval isn’t something you can negotiate. You’re approved at the level you’re approved at! Still, if you have bad credit, getting a co-signer on your lease allows you to pay rates at the co-signer’s level of credit.
Offering one-pay or multiple security deposits are then the only ways to really negotiate on the money factor. Otherwise, you’ll have to just shop around for a bank that offers you a lower money factor.
When you’re in the market to lease a car, all these numbers and complicated financial calculations can seem a little daunting. That’s why it’s often recommended to hire an automotive consultant. At Capital Motor Cars, we offer Free Automotive Consultation and provide a unique proprietary pricing tool called Ignite which is an online leasing calculator that allows you to structure the terms of your own lease with simplicity and transparency.
The main takeaways about money factor:
• It’s a decimal representation of marginal interest rates
• Lower money factor equals lower monthly payments
• Money factor can’t be negotiated but you can influence it through a few other factors
Happy car hunting!