What Is Lease Money Factor and How Does It Work

The lease money factor is a crucial component of a car lease, and it's essential to understand how it works. It's a percentage that represents the cost of using the vehicle for a year.

The money factor is usually expressed as a decimal, and it's calculated by multiplying the monthly payment by 12 and then dividing by the total amount borrowed. For example, if your monthly payment is $400 and the total amount borrowed is $20,000, the money factor would be 0.00625.

This means that for every dollar you borrow, you'll pay 0.00625 in interest over the year. The money factor is used to calculate the total interest paid over the lease term, which can range from 24 to 60 months.

Consider reading: How to Convert Money Factor to Interest Rate

A lease is more than just a monthly payment, it's a contract that includes several fees and costs. Your lease payment is made up of multiple parts, including depreciation, which makes up the majority of your lease payment.

Cars that are expected to hold their value well tend to have lower lease payments. A Subaru Solterra EV with top-tier credit has a money factor of 0.00110, or 2.64% on the West Coast, which is a terrific deal for a $46,220 electric vehicle.

You'll also need to pay other leasing fees, such as a security deposit, disposition charge, acquisition fee, and tag/title/registration fees. Sales tax is typically rolled into your lease's monthly payment, and the amount varies by state.

It's essential to compare all the parts of a lease deal, including lease cash offers, loyalty bonuses, down payment requirements, leasing fees, and the money factor. A great lease deal might have a high money factor, but a fantastic cash bonus, so it's all about looking at the bigger picture.

If this caught your attention, see: No Deposit Vehicle Leasing

The lease money factor is a crucial aspect of car leasing that can significantly impact your monthly payments. It's largely based on your credit score, with higher credit scores resulting in lower money factors and lower credit scores resulting in higher money factors.

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A borrower's credit score is one of the primary factors that affect the lease money factor. Borrowers with higher credit scores will often have a lower money factor on a lease.

The lease money factor is also affected by the length of the lease. Generally, longer leases tend to have lower money factors than shorter leases.

The type of vehicle being leased and the region in which the lease is taking place can also impact the money factor. Luxury vehicles and vehicles in high-demand areas are typically associated with higher money factors.

To convert the money factor of a car lease into an understandable figure, you can multiply it by 2,400; it will yield the APR of the money factor.

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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.

The lease charge is the sum of all future monthly finance costs over the entire life of the lease, and it's used to calculate the money factor if the car dealer quotes a lease charge instead of an interest rate.

The formula to calculate the money factor is: Money Factor = Lease Charge / (Capitalized Cost * Residual Value) * Lease Term.

You can also calculate the money factor by multiplying the lease charge by the lease term and dividing by the capitalized cost and residual value.

A numerical example can be useful to understand the concept intuitively, for instance, a lessee leasing an old sports car for three years with a lease price of $50,000, a residual value of $10,000, and monthly finance fees of $6,000 over the entire 3 years, would have a money factor of 0.00278, equivalent to an APR of 6.67%.

To convert the money factor to the equivalent APR, you can multiply it by 2,400, or to convert the APR to a money factor, you can divide it by 2,400.

Here's a quick reference guide to help you calculate the money factor:

Keep in mind that the money factor is the interest rate on your car lease, expressed as a decimal rather than a percentage, and it's affected by factors such as the lessee's credit score and the length of the lease.

A lower money factor is more favorable to a borrower as it signifies a lower financing charge. A good money factor of 25 (0.0025) and below translates to an imposed 6% APR.

The money factor is largely based on the borrower's credit score. Borrowers with higher credit scores will often have a lower money factor on a lease, while lower credit borrowers will have higher money factors.

The length of the lease also affects the money factor; longer leases tend to have lower money factors than shorter leases. Factors such as the type of vehicle being leased and the region in which the lease is taking place can also impact the money factor.

If you're not happy with your leased vehicle, you can return it to the lessor, but be prepared for fees, including an early termination fee and remaining depreciation on the car.

Returning the car to the lessor is the simplest way to get out of an auto lease, but it comes with a price tag.

Typical fees for returning a leased vehicle include an early termination fee and the remaining depreciation on the car.

You can also transfer the lease to a new lessee, but this involves administrative fees, which can amount to several hundred dollars.

Specialist lease swap websites can help match buyers and sellers of leases and provide transparent information about costs.

Transfer of a leased vehicle is only possible if permitted within the terms of the lease agreement and is legal in the respective U.S. state.

In some cases, you can buy out the leased vehicle at a specified price, effectively ending the lease, but this only makes sense if the buyout price is less than or close to the resale value of the car.

If you're in financial trouble, you can talk to the lessor to see if they'll offer payment relief for a few months, but you'll have to make up the difference later on.

Here are the options for exiting a car lease:

A money factor may be presented as a factor of 1,000, such as 2.0, rather than 0.002. This whole number can still be converted to an APR by multiplying it by 2.4.

For instance, a money factor of 2.0 translates to an APR of 4.8% when multiplied by 2.4. This is not the actual APR on the lease, but rather a way to compare the two values.

Remember, the money factor will always be lower than the APR, even when displayed as an integer greater than 1.

Additional reading: How Does Car Financing Apr Work