If you’re interested in leasing a car, you may have heard the term “money factor” at some point during the process. But with so many complicated car-leasing terms floating around, you may not be certain exactly what this one means. So what exactly is the money factor? We’re here to help you understand it.
What Is the Money Factor?
Strictly speaking, the term “money factor” refers to the interest rate on a car lease, but it isn’t expressed in the same way. The money factor on a lease is almost always written using an extremely small decimal, such as 0.00167 — and that’s when it’s written at all. Most drivers with leased cars don’t really know what their money factor is, and they don’t think to ask about it when signing the lease papers.
How Does It Affect Your Lease?
Drivers should ask about the money factor when leasing a car, because it can be very important to the monthly payment. Here’s why: While most shoppers think leasing simply means paying the depreciation of a vehicle, there’s also a finance charge included in every lease. That finance charge is the money factor. This is money the dealer or automaker is charging you for the privilege of leasing.
In order to calculate your lease’s interest rate, multiply the money factor by 2,400. In the example above, that 0.00167 money factor translates to a 4 percent interest rate — and a higher monthly payment than if you had a money factor of, say, 0.0008, which is roughly a 2 percent interest rate. Just like when you’re buying a car, the interest rate on a lease can have a huge effect on your monthly payment.
Our conclusion: Before signing any car-lease papers, ask about the money factor, and don’t listen to any salesperson who says that you simply move over the money factor’s decimal point to get the interest rate. Instead, multiply the money factor by 2,400. If the rate you see is higher than you’re expecting, negotiate a lower money factor or move on to a better deal.