What is the Money Factor?
The Money Factor is the percentage of a lease's monthly bills allotted to its financing costs. It is also called a "lease factor" or "lease fee”, an auto leasing industry term for expressing the interest rate used to calculate the monthly lease payment. The money component refers to the cost of supporting a mortgage or rent payment. It is comparable to the payments on a mortgage.
It's related to the interest rate, and the user’s credit score similarly determines it. It's usually shown as a very low decimal. A similar yearly percentage rate is calculated by multiplying the money component by 2,400. (APR or Annual Percentage Rate).
Understanding of Money Factor
It should be highlighted that the money aspect can be complicated to understand due to the protocol. For example, the leasing charge, lease variable, or factor is another name for the money element. Moreover, it is believed that the higher the money element on a lease, the higher the overall lease amount in a month will be.
The interest expense is another thing to consider about the money component. It's simply the amount of money the lessor anticipates to make on the leased out property.
How to Calculate Money Factor?
In a car lease, the financial element is usually delivered by a car dealer or a financial institution; still, it is necessary to know how it is estimated. The formula for calculating the money component is as follows:
Money Factor = Lease Charge / (Capitalized Cost x Residual Value) x Lease Term.
Practical Example
A mathematical model of the money factor is helpful in immediately understanding the concept. Here's an illustration:
For three years, a lessee is borrowing an ageing sports automobile. The lessee and the salesperson agreed on a $60,000 lease price. The vehicle will still be worth $20,000 at the end of the contract. For three years, the monthly loan fees will total $8,000.
Money Factor = $8,000 / [($60,000 + $20,000) * 36]
= 0.002778
Money Factor as an APR = 0.002778 * 2400
= 6.667%
(The lease period is written as 36 in the calculation because the formula needs the lease term to be expressed in months; three years equals 36 months.)
In Sentences
- The term money factor is commonly used to indicate a cost added to the total monthly bill on a fresh or just used vehicle lease.