Save Cash By Calculating Your Money Factor
A study conducted by the BuyingAdvice Team revealed that consumers are often overpaying on their auto leases due to exorbitantly high money factors. Consumers that don’t know what the money factor is are easy targets for signing leasing contracts with high interest rates. First thing you must know is that the money factor is equivalent to the interest rate you would receive on an auto loan.
One common example of this is consumers who get really excited about a super low Gross Capitalized Cost (aka, total new car sale price) and sign the auto lease with a super high money factor.
If you don’t pay attention to the money factor, a dealer can charge you a much higher annual percentage rate (APR), or interest rate, than you should be paying.
With the BuyindAdvice conversion formula you can easily calculate what your APR is when you see the money-factor.html figure.
These are the three parts of a lease:
- Gross Capitalized Cost, or the price you pay for the car.Gross Capitalized Cost, or the price you pay for the car.
- Residual value, or the car’s value when your lease ends. This is the amount you would need to pay if you decided to keep the car.
- Money factor, or the interest rate built into the lease.
The money factor is usually a long decimal number. Don’t think this is the annual interest rate you’ll be paying.
So here’s what you do: You have to ‘translate’ it. To convert this number into an interest rate you can understand, multiply it by 2400 (no matter how long your lease is). For example, if the money factor is 0.00209, your interest rate will be 5%.
If you have the interest rate and want to translate it into the money factor, do the opposite. Divide the interest rate by 2400. For example, for 2.9% interest rate, the money factor would be 0.00121.
Interest Rate = Money Factor x 2400 |
The money factor is also sometimes called a ‘monthly finance fee’ or ‘lease factor.’ The law does not require that this number be included in the lease contract. Instead, you’ll find a ‘lease charge,’ which is your monthly finance fees added together. To find your money factor in the contract, first add your net capitalized cost and your residual value. Then multiply this number by the term. Divide the lease charge by this number, and you’ll get your money factor. To simplify:
Money Factor = Lease Charge/((Net Cap Cost + Residual) x Term) |
When it comes to leases, you should know that the money factor is negotiable. In some unfortunate cases, dealerships have made exorbitant profits due to consumer ignorance about auto leasing.
Be aware of what kind of money factor or APR% you want and can afford! To find out a fair money factor, apply for a no obligation auto loan for the net capitalized cost, and see what your interest rate is; your interest rate on an auto loan and the money factor are equivalent. Leasing doesn’t have to be a nightmare; if you know what you’re doing, it’ll be a breeze.
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