How money factor works
By Jude Wallis
A money factor is the interest rate on a lease, written as a small decimal. Multiply it by 2400 and you have the annual percentage rate: 0.00125 is 3 percent. Divide an APR by 2400 to go the other way, so 4.8 percent is 0.002.
Money factor
0.00125
APR divided by 2400. Implied APR is 3.00%.
- Money factor
- 0.00125
- APR
- 3.00%
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In short
- Money factor times 2400 is the APR, and APR divided by 2400 is the money factor.
- The 2400 is 2 times 12 times 100: twice the average balance, months in a year, and percent to decimal.
- 0.00125 is 3 percent. 0.002 is 4.8 percent. Two decimals that look almost identical are more than a point apart.
- The money factor is applied to capitalised cost plus residual, which is why the doubling appears in the constant.
Taking the 2400 apart
The constant is three conversions multiplied together. First, a lease applies its charge to capitalised cost plus residual, which stands in for twice the average amount financed over the term, so there is a factor of 2. Second, the money factor is a monthly rate, so twelve turns it annual. Third, 100 converts a decimal to a percentage. Multiply 2, 12 and 100 and you have 2400.
Once that is clear the conversion stops being a magic number to memorise. It is the same interest rate as any loan rate, expressed for a charging convention that does not track a falling balance.
The decimals hide the difference
Rates are easy to compare because they are scaled to numbers people have intuitions about. Money factors are not. A quote of 0.00125 and a quote of 0.002 look almost the same on paper, and one is 3 percent while the other is 4.8 percent.
That gap is money. The rent charge on a lease is the money factor applied to a base in the tens of thousands, so a difference in the fourth decimal place moves the monthly payment noticeably. Convert first, react second.
Where the rate sits in the payment
A lease payment has two parts, and the money factor only drives one of them. Depreciation, the capitalised cost minus the residual over the term, is usually the larger part. So a very low money factor on a car with a weak residual can still produce an unattractive payment. How car leases work shows the two charges separately.
That also means there are three things to negotiate rather than one. Capitalised cost is the most negotiable, the money factor is often movable within a band the finance company sets, and the residual is usually fixed. The car lease calculator shows what moving each one does.
Comparing a lease with a loan
Once converted, the lease rate can be judged against the car loan rates actually available to you, since both are the price of borrowed money. That comparison is the point of the conversion. Money factor against APR sets the two quoting conventions side by side, lease against buy prices the whole decision, and APR covers what an annual rate is meant to include. The money factor calculator does the conversion in both directions. This is educational material, not financial advice.
Worked examples
A 3 percent lease rate
A lease is quoted at the equivalent of 3 percent APR. What money factor does the contract show?
- Divide the APR by the conversion constant: 3 over 2400.
- The money factor is 0.00125.
0.00125, which multiplied back by 2400 returns the 3 percent it came from.
A 4.8 percent quote
A second finance company quotes 4.8 percent. What is that as a money factor?
- Divide 4.8 by 2400.
- The money factor is 0.002.
0.002. It looks like a rounding difference from 0.00125 and it is 1.8 points more expensive.
Common questions
Why not just quote the APR?
Convention, plus the fact that the charge is applied to cost plus residual rather than to a declining balance.
Can the money factor be negotiated?
Often, within a band the finance company sets, in the same way a loan rate can be.
Is a lower money factor always better?
For the finance charge, yes. The payment also depends on the capitalised cost and the residual, which usually matter more.
Is this financial advice?
No. It is educational material about a rate conversion.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.