What is a Money Factor?
During your shopping experience, you might feel overwhelmed by the number of options you have to choose from for purchasing a vehicle. Do you want to pay cash? Would you rather finance? Have you ever considered leasing? The list goes on and on.
One term that you might have come across but aren’t clear on how it works is a money factor. A money factor, or sometimes better known as a “lease factor” or “lease fee,” is a different method of showcasing the amount of interest charged on a lease with monthly payments.
As you can assume from the name, this method only comes into play when you are considering leasing a vehicle, not with a retail purchase. If you wanted to calculate how a money factor translates into the more common annual percentage rate (APR), you simply need to multiply the designated money factor by 2,400.
Why do we use a Money Factor?
If you plan to lease the vehicle, you will only pay for the amount that the vehicle depreciates during a specific period of time. These monthly payments are fully inclusive of depreciation, taxes, and interest.
The money factor is used in order to determine the interest portion of the equation that amounts to your monthly lease payments. In other words, the money factor is what decides how much interest is charged for each monthly payment.
How is the money factor calculated?
There are two ways that are used to determine the money factor. As mentioned previously, this can be calculated as a more common APR rate simply by multiplying the money factor by 2,400. For example, if a quoted money factor is .003, the APR for this load would be around (.003) x 2,400 = 7.2%.
An alternative method for calculating a money factor is using the lease charge. This can be used as a substitute for an interest rate and would be calculated as follows:
Money Factor = Lease Charge / (Capitalized Cost + Residual Value) X Lease Term
The lease charge is the sum of all the monthly finance fees over the full duration of the lease. The capitalized cost, also known as a “cap cost,” is the agreed-upon price of the vehicle at the end of the lease. The lease term is the duration of time that the car has been purchased.
What should I do next?
Leasing, money factors, cap costs – it all sounds pretty overwhelming. You might be asking yourself, “how do I know if this is the correct option for me?” Leasing is a big decision and the best way to find out if it is the right decision for you is to start by calling a sales and leasing consultant at one of our Jim Coleman Auto Group dealerships and explaining your situation.
We are here to assist with all of these important questions and have specialists on hand to accommodate any and every situation that might be unique to you. If you already have a vehicle in mind and would like to know more about the money factor, cap cost, or next steps, please inquire on that specific vehicle’s page, or simply come into our dealership and meet with one of our sales and leasing consultants. Remember, we are located in the Bethesda, Clarksville, and Silver Spring areas.
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