Money Factor
What Is Money Factor?
Money factor is a method for determining the financing charges on a lease with regularly scheduled payments. A money factor can be converted into the more normal annual percentage rate (APR) by increasing the money factor by 2,400.
Money factor is otherwise called a "lease factor," "lease fee," or "lease money factor."
How the Money Factor Is Used
An individual who takes out a lease on a vehicle pays for the amount by which the value of the vehicle devalues during the time he is in possession of it. The month to month lease payments made on the vehicle incorporate depreciation, taxes, and interest. Assuming the vehicle is expected to devalue in value by $5,000 annually, this amount will be factored into the regularly scheduled payments. Sales taxes are charged on both depreciation and interest and are remembered for the regularly scheduled payments of the lessee.
To determine the interest portion of month to month lease payments, the money factor is utilized. In effect, the money factor is the interest rate that is paid for the duration of a lease term. It is like the interest rate paid on a loan, however the value of the money factor is communicated in an unexpected way.
Dissimilar to APR, which is communicated as a percentage, the money factor is communicated in a decimal configuration. One way or another, the interest rate and money factor can be acquired by reaching the vehicle dealer or checking with the credit union.
Important
The money factor is straightforwardly determined by a client's credit score. The higher the credit score, the lower the money factor on a lease, and vice versa.
Computing the Money Factor
The money factor can be calculated in two ways. One method depends on knowing the APR of the lease, while the other method requires leasing data like payments, residual value, and the duration of the lease.
APR Method
To start with, the money factor can be changed over completely to the equivalent APR by duplicating by 2,400. Along these lines, on the off chance that the vehicle dealer utilizes an interest rate, this can be changed over completely to a money factor by partitioning by 2,400.
For instance, assuming that quoted a money factor of .002, the interest rate on that loan would be roughly (0.002) x 2,400 = 4.8%. Moreover, in the event that the vehicle dealer cites a lease APR of 4.8%, a lessee can figure out the money factor of .002 by separating the APR by 2,400.
Leasing Information Method
The second method of working out the money factor is utilizing the lease charge. In the event that rather than an interest rate, the vehicle dealer cites a lease charge, the money factor can be calculated as:
Money Factor = Lease Charge/(Capitalized Cost + Residual Value) * Lease Term
The lease charge of this formula is the sum of all future month to month finance costs over the whole life of the lease. The capitalized cost is the settled upon cost you consent to pay for the vehicle, while the residual value is the settled upon value of the vehicle toward the finish of the lease. The lease term is communicated as the total number of months of the lease.
Special Considerations
A money factor may likewise be introduced as a factor of 1,000, for example, 2.0 instead of .002. While the decimal variant is more normal, a money factor that is a whole number can in any case be changed over completely to an APR by duplicating it by 2.4. For instance, a money factor of 2.0 means an APR of 4.8% when the money factor is increased by 2.4.
It is important to recall the 2.0 figure portrayed above isn't the APR on the lease. The money factor will continuously be lower than the APR, even when shown as an integer greater than 1.
As well as being determined by the borrower's credit history, the money factor is likewise impacted by the financing organization's rates as well as the dealer's markup. The money factor for a lease has generally been comparable to the national average for new vehicle loans.
Highlights
- Increasing the money factor by 2,400 will give the equivalent annual percentage rate (APR).
- A lower money factor is better to a borrower, and the money factor can be negotiated.
- It is commonly portrayed as a tiny decimal that starts in the thousandth place (i.e., 0.00#).
- The money factor is the financing charge a person will pay on a lease.
- It is like the interest rate paid on a loan, and it is additionally founded on a client's credit score.
FAQ
Could You at any point Negotiate Money Factor?
The debatability of the money relies upon the dealer. A few dealers may expressly state the money factor isn't negotiable, while others are available to arranging the money factor to adjust to current market interest rates.
What Is a Good Money Factor?
The money factor is the interest assessment on a lease. Hence, a lower money factor is better to a borrower as it connotes a lower financing charge. A decent money factor will to a great extent rely upon borrower credit and winning market conditions, however a genuinely decent money factor of 25 (0.0025) and below means a forced 6% APR.
Is Money Factor Based on Credit?
A borrower's money factor is to a great extent founded on the borrower's credit score. Borrowers with higher credit scores will frequently have a lower money factor on a lease, while lower credit borrowers will have higher money factors.
How Is Money Factor Calculated?
There are several methods for ascertaining the money factor. To start with, the money factor can be duplicated by 2,400 to show up at an APR. On the other hand, the formula below can be utilized as a substitute:- Money Factor = Lease Charge/(Capitalized Cost * Residual Value) * Lease Term
What Is a High Money Factor?
Every borrower will have their own perspective in regards to what comprises a high money factor. By and large, a money factor of something like 35 (0.0035) means essentially a 8.4% APR. For some, a money factor of no less than 35 would be viewed as high.
