Money Factor

It measures the cost of borrowing in leasing, and is expressed as a decimal which impacts the monthly payments on assets like cars

Author: Austin Anderson
Austin Anderson
Austin Anderson
Consulting | Data Analysis

Austin has been working with Ernst & Young for over four years, starting as a senior consultant before being promoted to a manager. At EY, he focuses on strategy, process and operations improvement, and business transformation consulting services focused on health provider, payer, and public health organizations. Austin specializes in the health industry but supports clients across multiple industries.

Austin has a Bachelor of Science in Engineering and a Masters of Business Administration in Strategy, Management and Organization, both from the University of Michigan.

Reviewed By: Christopher Haynes
Christopher Haynes
Christopher Haynes
Asset Management | Investment Banking

Chris currently works as an investment associate with Ascension Ventures, a strategic healthcare venture fund that invests on behalf of thirteen of the nation's leading health systems with $88 billion in combined operating revenue. Previously, Chris served as an investment analyst with New Holland Capital, a hedge fund-of-funds asset management firm with $20 billion under management, and as an investment banking analyst in SunTrust Robinson Humphrey's Financial Sponsor Group.

Chris graduated Magna Cum Laude from the University of Florida with a Bachelor of Arts in Economics and earned a Master of Finance (MSF) from the Olin School of Business at Washington University in St. Louis.

Last Updated:September 12, 2023

What Is Money Factor?

The money factor (MF) in finance measures the cost of borrowing in leasing, and is expressed as a decimal which impacts the monthly payments on assets like cars.

When a person leases a car, they pay for the amount by which the vehicle's value depreciates over the time the person owns it, a lending specialist with US Insurance agents explained in an email to The Balance "Monthly lease payments include depreciation, taxes, and interest."

Although the money aspect is comparable to loan interest, it may not be included in a lease agreement.

Unlike an Annual Percentage Rate (APR), which must be disclosed to a customer seeking a loan by law, a leasing agency has no legal responsibility to provide or explain the monthly payment to the consumer.

Most dealers will not tell you until you ask, and most consumers are unaware that they should—but it's critical information since it plays a significant part in determining someone's monthly payments.

So, what should a customer know about money? A smart place to start is to compare the money component to vehicle loan interest rates.

When translated to APR, the MF should be comparable to national new-car loan interest rates, if not lower. The lower the money component, the lower someone's monthly lease payments and overall financing charges.

The money component is most commonly used in automobile leases, yet it can also be used in other types of loans, such as mortgages and personal loans. Taxes, depreciation of the vehicle, and interest are all included in the lease payments. The money element determines the interest rate. 

The monthly payment component on a car lease is technically and conceptually very similar to the interest on a monthly mortgage payment. However, as previously said, it is cited unusually.

To translate a vehicle lease's MF into a comprehensible amount, multiply it by 2,400; this yields the APR of the MF, which is essentially the car lease's APR interest rate. When applying for a car lease, displaying a solid credit score lowers the money element of the lease, lowering monthly lease payments.

It is argued that MF is a gray area in the car lease industry, primarily because many customers do not understand the concept. It is also argued that customers may not understand the direct effect on the monthly lease payments or that the MF is quoted at 1/2400 of an APR.

Key Takeaways

  • Money Factor (MF) is an additional cost in monthly car lease payments, representing a portion of the vehicle's overall cost.
  • While similar to loan interest, MF may not always be explicitly disclosed in lease agreements, unlike the Annual Percentage Rate (APR) for loans.
  • Understanding and knowing Money Factor is crucial for determining monthly lease payments, and comparing it with vehicle loan interest rates is advisable.
  • It can be calculated using a formula involving lease charges, capitalized cost, residual value, and lease term. It can also be converted to APR by multiplying by 2,400.
  • A lower MF is advantageous and can result from a higher credit score. Understanding these financial aspects empowers consumers to make informed leasing decisions.

How The Money Factor Is Used?

A lower loan rate means a cheaper monthly automobile payment. However, as seen in our example above, the interesting part of a lease payment is a relatively minor fraction of the total lease payment. 

The majority of someone's automobile lease payment is based on depreciation, which is the difference between the capitalized cost of his car and its residual value after the lease period.

A person who takes out a car lease pays for the amount by which the vehicle's value depreciates during the period he owns it. 

The car's monthly lease payments include depreciation, taxes, and interest. If the car's value is predicted to degrade by $5,000 annually, this amount will be incorporated into the monthly payments. 

Sales taxes are imposed on depreciation and interest and are included in the lease's monthly payments. The money factor calculates the interest component of monthly lease payments.

The money factor is the interest rate paid over a lease term. The value of the money element is stated differently from the interest rate paid on the loan.

In contrast to APR, which is a percentage, the MF is expressed as a decimal. In any case, call the auto dealer or the credit union to receive the interest rate and money factor.

A customer's credit score strongly influences the money factor. The smaller the money element on a lease, the higher the credit score, and vice versa.

The money element is the lease interest assessment. As a result, a smaller MF is more advantageous to a borrower because it indicates a reduced financing price.

A decent money factor will be determined mainly through borrower credit and market conditions, but a very good MF of 25 (0.0025) or less amounts to a 6% APR (2,400 * 0.0025 = 6.00%).

Converting Money Factor To APR

The customer's credit score determines the money element. The lesser the MF on the lease, the higher your credit score. Converting the money component to an APR is one method of calculating it.

To do this, increase MF by 2,400. If you get an interest rate from a vehicle dealer, divide it by 2,400 to get the MF.

For example, if someone is charged MF of 0.003 on a loan, the 7.2 percent figure is (2,400 x 0.003). If the auto dealer charges you a 4.2 percent interest rate, divide that by 2,400 to get the MF of 0.00175.

The money component may be shown in a more readable style, such as 1.75 instead of 0.00175. However, customers are frequently perplexed by this since it looks like a low interest rate. 

However, don't be duped by MF, given a factor of 1,000. Always inquire whether the figure someone is provided is the APR or the money element. If it's the money element, convert it to APR so you can read the interest rate.

The leasing charge is another approach to computing the MF. If the dealer charges someone a leasing charge, he may calculate the MF using the method below.

MF = Lease Charge / [(Capitalized Cost + Residual Value) * Lease Term]

  • Lease Charge: The total amount is due every month for the lease term

  • CC: The capitalized cost of a vehicle is the amount you agree to pay

  • RV: Remaining value is what the vehicle is worth at the finance closed-end lease's end

  • LT: The duration of the lease, measured in months

Calculating Money Factor

The customer's credit score also influences the money factor, so someone should check your credit score regularly. It is also influenced by the bank or finance company's interest rate and the dealer's fee markup, sometimes known as the "buy/sell rate."

A general formula is used to calculate the money factor:

MF = Lease Charge / [(Capitalized Cost + Residual Value) * Lease Term]

By multiplying the money component by 2,400, someone may get an interest rate of 2%. If he knows the APR, he may divide it by 2,400 to calculate the money factor.

Assume anyone wishes to lease a used SUV for three years, and the auto dealer or leasing agent agrees on a $45,000 price. The car is worth $15,000 after the lease, and you paid $7,000 in financing costs throughout the lease.

The MF is calculated by dividing the financing charge by the capitalized cost plus the residual value multiplied by the number of months the vehicle was leased.

The formula is as follows:

MF = $7,000 / [($45,000 + $15,000) * 36] = 0.0032

In this situation, the MF is 0.0032

For APR, we'll multiply that figure by 2,400, i.e.,

APR = 0.0032 * 2400 = 7.68%

The Annual Percentage Rate is 7.68%

Understanding how vehicle dealers and leasing agents arrive at the APR will be easier if someone can compute the money element. 

The more you understand how the numbers work regarding vehicle leasing, the better-equipped you will be to make sensible financial decisions that meet your needs.

Money Factor Numerical Example

Let us take an example to understand how to calculate the Money Factor and the APR.

To begin, multiplying the money component by 2,400 yields the corresponding APR. In the same way, if the automobile dealer uses an interest rate, divide that by 2,400 to get an MF. 

For example, if a loan is quoted with an MF of 0.002, the interest rate will be

(0.002) x 2,400 = 4.8%

Similarly, if a car dealer offers a lease APR of 4.8 percent, the money component may be calculated by dividing by 2,400.

A money factor can be expressed as a factor of 1,000, such as 2.0 instead of 0.002. While the decimal form is more frequent, a whole number money component may still be converted to an APR by multiplying it by 2.4. 

The above example will compute the interest rate as

(2.0) x 2.4 = 4.8%

It is critical to realize that the 2.0 shown above is not the lease APR.

An automobile, for example, has a sticker price of $32,500. A lessee and dealer bargain and agree on a reduced price of $30,000 for the leased vehicle. The vehicle will be leased for four years (or 48 months) and has a residual value of $15,000.

The monthly costs total $4,750. As a result, the monthly factor is:

MF = $4,750/ ($30,000 + $15,000) × 48

= $4,750/ $2,160,000 = 0.002199

The APR is thus

APR = 0.0022 x 2,400 = 5.28%

The monthly lease interest payment is

($30,000 + $15,000) x 0.002199 = $98.955 (confirmed by the leasing charge of $4,750/48 periods)

Also, assuming the vehicle costs $37,500. The buyer and dealer agree on a lease price of $34,000. The lease duration is three years, or 36 months, with a $21,000 residual value. The monthly costs total $5,500.

MF = $5,500/ [($34,000 + $21,000) * 36]

= $5,500/ $1,980,000 = 0.00278


APR = 0.00278 * 2400 = 6.67%

Money factors are employed when monthly payments may vary depending on the residual value of an item, such as a vehicle lease. The investor pays the difference between the vehicle's retail value and the interest payments under a regular lease.

When translated to APR, the MF should be comparable to, if not lower than, national new-car loan interest rates. The smaller the money element, like interest on a loan, the cheaper your monthly lease payments and the less you will spend in total finance charges. 

While the conversion factor remains constant at 2,400, the lessee's credit history determines the MF. A bad credit history means a greater MF.

Researched and authored by Fatemah Kamali | LinkedIn

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources: