Money factor Definition, Calculation, Lease factors – Everything you need to know
Money factor which is also known as ‘Lease factor’ is a term usually expressed while leasing a car. It is the finance rate you are going to pay for the car lease. If you are looking at leasing a car, then you should know about this term. There are many explanations available which are confusing. Hence this post will help you get to know all the details regarding the money factor. Many people who are new to this have doubts like what determines the money factor in a car lease and how money factor is calculated. All the doubts can be clarified with the details below.
What is the money factor in a car lease?
When you are signing the papers for a car lease, you would sign by agreeing to the money factor. It is the interest rate you are going to pay for leasing that car for a specific period. But many of us do not notice this while signing the papers. This is because the money factor is a smaller decimal which is approximately 0.00167 of the rate. Hence many people will not care about this important element while leasing a car. But it plays a major role in buying a lease car as a lesser money factor can lower your depreciation payment at the end of a lease.
How to spot a good lease for your car?
If you are looking for getting a lease, then there are doubts arising like what determines the money factor in a car lease and how money factor is calculated. The first step when you lookout for a car lease is the availability. Many companies provide car leases. But for car leasing shoppers there are a whole bunch of questions about the monthly payments to be done, the money required to start the process, and the miles allowed for the lease. All these are covered at ease for the customers depending on the plan chosen by them. Before getting into that there are two major types of money factor as follows
- Open-end car lease:
- If you are looking for lesser monthly payments, then you can choose the open-end lease option. This is cheaper compared to the close end leasing.
- Also, the vehicle can be leased only after making the entire payment. The actual market value of the car lease is way lesser than the calculated residual value of the lease.
- Hence it makes the customers sell their cars for gain and this is used for the people who do not wish to spend more money.
- It is mostly preferred by fleet services where better costs can be negotiated.
- Close end car lease:
- It is the most common type of car lease chosen by consumers. The company that leases the car estimates the amount which is lesser than the residual value.
- If the car is returned before the lease is over, then the money is even lesser than the residual value.
- The customers ought to pay only the charges for wear and tear.
- Also, with close end car lease option, if the customer likes a used vehicle at the time of the lease, he has the option to make a purchase.
- In this post, you can get a clear idea of what determines the money factor in a car lease and how the money factor is calculated.
Factors to choose a car lease
If you are looking for a potential car lease, then it is important to know the factors by which you need to frame up the car lease.
- Money factor: During the lease, the amount of money paid by the customer is called the money factor and it should be low. It is the lease fees paid for leasing the car and it is important to choose the car lease which has least money factor. It is often misunderstood with Annual Percentage Rate cousins or APR cousins. The money factor can be calculated with interest rates. To get the money factor from the interest rate, then the rate of interest value is divided by 2400. To get the rate of interest from the money factor, then the value should be multiplied by 2400. If the money factor obtained is not smaller than compared to the other companies, then you need to choose the cheaper ones.
- Residual value: It is the most important factor in leasing a car and is the worth of the car at the end of the lease period. This value is determined by the licensed car lease provided by the bank. The residual value is important as it is inversely proportional to the payment made by the customer. The residual value should be higher so that the payments can be paid less. The price of a car lease can be calculated by the difference between the car’s residual value and its selling price.
- Fees: There are different fees asked during a car lease like disposition, acquisition, and deposit. These fees are available at different price ranges and the customers can ask for a reduction. The price range of acquisition fee from different companies ranges from 600 USD to 1000 USD. Other than this fee, there are also higher chances for the company to ask other fees. Hence the number of fees can be waived before you look out for a car lease.
- Customer retention: This is another important factor where the customer is provided with different deals. The discounts offered are mostly retention rebates to make the customer come back for their services repeatedly. Some car leasing companies also provide sweet deals to the customers if they especially have a car from specific brands with respective deals. Similarly, there are discounts for employed graduates, college students, military personnel, and so. This process is used by many car leasing companies to have their band of repeat customers who get their services.
Money factor in leasing a car
The car lease is an easy concept where the customer buys the car and sells it before the lease period ends. The lost value of the vehicle during its usage is the main factor for the companies to gain profit. The worth of the car is less compared to when it was new. The car value depreciation is the major factor where the money factor comes as an important aspect.
The cars when bought are used by the drivers with their maximum ability and the drivers are ready to use the same car by making repairs whenever necessary. But if this limit exceeds the increased issues of the car, then the driver looks for selling the car. Now the value of the car gets lost and this is depreciation. If this happens when the car is leased, then the depreciation expenses are inevitable.
Once the car is bought and used, before the lease period ends, the borrower calculates the depreciation expense. At the end of the lease, it gets calculated accurately by the experts. This is mostly calculated depending on two things like the age of the car and the distance traveled by it in the period of the lease. The lease period varies usually from 24 to 48 months.
How to Calculate the Money factor?
The solution to the query what determines the money factor in a car lease and how money factor is calculated can be seen now. The money factor is similar to paying the interest of a car loan. Like the loan provided, it depends on the credit score of the individual with the money factor similarly.
The money factor is calculated in a smaller decimal as it going to be the interest in the total lease period. The important term needed during the calculation of Money factor is Annual Percentage Rate which is commonly known as APR.
The money factor can be calculated by knowing the interest rate of the lease period. However, it can be calculated by two methods.
- Conversion to APR: The money factor can be converted into Annual Percentage Rate by multiplying the same by 2400. Similarly, if the lease dealer uses an interest rate, then it can be divided by 2400 to get the money factor. For example, if the dealer quoted a money factor of 0.002, then the interest rate for the car lease is 0.002×2400=4.8%. Similarly, if the car lease dealer provides the interest rate for the lease at 4.8%, then the money factor can be calculated as dividing the interest rate by 2400.
- Using the lease charge: This is another method of calculating the money factor by using a lease charge. Some of the car dealers can provide the lease charge instead of the interest rate. In such cases, the money factor can be calculated as dividing the lease charge by the sum of capitalized cost and a residual value that is multiplied with the lease term.
Money factor = Lease charge (Capitalized cost + Residual Value) x Lease term
- The lease charge is nothing but the customer’s monthly payment towards the car lease. The capitalized cost, also known as lease price is the agreed cost of the leased vehicle. The residual value is the total value of the car at the end of the leasing period. The lease term is the total length of the time for leasing a car.
How this Money factor is being used while leasing a car?
The person who takes a car for lease has to pay for the amount of depreciation of the vehicle. When a customer buys a car for lease, then the depreciation of the car during the lease period is being taken into account. The total car lease is an addition of depreciation, tax, and interest.
- Depreciation: It is the highest value that makes up the total lease payment. It is calculated as the difference between capitalized cost and residual value which is divided by lease term. The capitalized cost is nothing but the selling price of the car.
Depreciation = (Capitalized cost – Residual value) / Lease term
- Interest: It is the next part of the lease payment where the leasing company makes the maximum gain. The other modes by which they gain money is through obtaining fees like disposition and acquisition fee. The interest is calculated as the addition of capitalized cost and residual value which is then multiplied by the money factor.
Interest = (Capitalized cost + Residual value) x Money factor
- Taxes: This is the final portion of your car lease payment. The taxes are collected in some regions for both depreciation and interests.
Total taxes = (Monthly cost of depreciation + interest) x local sales taxThese are the three main components that make up your total car lease payment. Hence the car lease payment is calculated as
Monthly lease payment = Depreciation + Interest +Taxes
Top reasons that you need to lease a car
The car lease is recommended by the financial experts compared to car loans. This is because the car loans have to be paid back by the customer with interest along with the original price of the car. But a car lease can be paid a certain amount, which is usually the difference between the residual value and purchase amount. The interest is paid only on this amount and not on the whole price of the leased vehicle. Hence it acts as a very important advantage for the people looking for leasing a car.
Reasons that you should buy a car lease
A car lease is said to have more advantages compared to a car purchase. Now there are many customers out there getting confused between getting loan or lease for the car. The total payment spends on leasing a car is proven to be less compared to purchasing a car. A car lease is said to have numerous benefits as follows
- Less monthly payments: The payment going to be done for leasing a car is only a portion compared to the payments made during purchase. Hence it makes it easy for the customers to buy a car lease with less monthly payments instead of the loan or cars. It is said that the monthly payments done on a car lease is 60% lesser than the monthly payments on a car purchase.
- Tax savings: When a car is leased, the tax is being paid only for the depreciation done for the leased car. Hence it is a negligible amount and is not like the ones for buying a new car. The tax is being paid for the depreciated money of the vehicle over the leasing period. The tax is not asked for the entire vehicle as they ask while making a purchase. The tax payment for a leased car is similar to that of insurance which is spread out and not collected as one.
- Down payment: The total amount you spend on getting the car for lease is less compared to that of making a purchase. It applies to all the expenses like monthly payments, and depreciation charges after the lease term. There will be no down payments which are collected as huge amounts when they ask while making a car purchase.
- No shopping needs: If you purchase a car, then there are higher chances of spending money on maintenance and services frequently. But when you lease a vehicle for 2 to three years, then there is only a meagre chance of spending on maintenance charges. If there are any repairs or issues then those costs can come under the warranty and hence it is not such a big deal to have a huge expense on a leased car.
- No risk of car loans: It is way better than loaning a car for which the payments has to be done monthly with interest for the car and the time. But while leasing a car, the interests are done only to the depreciation and taxes for the same. No interest is paid to the entire cost of the vehicle like a car purchase.
- In trend: The best thing about having a leased car is that you can change them after a lease is over to the new ones. You do not have to drive the same car which was purchased ten years ago and still paying the loan for that car. If you are a person who wishes to have newly modeled designs and technology in a car, then this option is the best suitable.
What are the things to know while leasing a car?
The car leasing option tends to have more advantages than others. For the question, what determines the money factor in a car lease and how the money factor is calculated, the fewer expenses option available while leasing a car can be the best answer? Following are the few perceptions which can make you clear about the idea of leasing a car.
- Deal: The deal in leasing a car has multiple advantages and the customers have to seal the deal in the right way. The first step is negotiating the lease price as there are many lease providers and you can choose the cheaper options. The similar model car can be obtained at a few costs cheaper in other competitor and hence you need to research well about the lease price. This should be done carefully as some companies can offer fewer leases and inflate the residual charges at the end of the lease term.
- Money factor: The money factor can be calculated for the lease once you get the car for a deal. It has to be calculated and does not expect minimum interest charges. Though the money factor will be less compared to the interest asked during a purchase, they can inflate the interest for depreciating at the end of a lease when negotiated. It is important to shop around the best lease provider who offers at the right money factor.
- Monthly payments: Many companies provide zero signing charges for leasing your car. But you can pay a smaller amount of money at the beginning of the lease. This is because the payments have higher chances of lowering when a small amount is paid at the beginning of a lease. This reduction is called a capitalized cost reduction fee. It is advised that the payments can be lowered but they cannot be obtained back.
- Insurance: The most important thing to have for a customer while leasing a car is the gap insurance. Though you get your car dent damaged in your first ride, it will add upon the depreciation charges at the end of your lease. This helps in not getting stuck with larger payments after the lease or paying for the damages while owning the lease. It is important to ask for the gap insurance coverage options available by the leasing providers. Some companies offer the same insurance coverages with various names and you can go for a shop to know all the availability.
- Length of the lease and miles coverage: There are lease options for low and high mileages. Hence it is important to calculate the type of mileage you need before you lease a car. If you are not the person who goes for long drives then low mileage lease can be obtained. Else, if you have relatives to be often visited at a great distance, then you can go for high mileage leasing options.
These are the solutions to the question asked by many car leasing beginners what determines the money factor in a car lease and how money factor is calculated. The car leasing option has a major dependency over money factor. The car with the right money factor is beneficial for the customers leasing the car as well as to the lease providers. Hence the bottom line is the good deal that offers the customers with best leasing amount. Based on prevailing rates, the best leasing rate can be calculated and the leasing providers can be searched, after you can go easily with the car lease.