A money factor looks like a typo. It is a number such as 0.00215, printed in a box on a worksheet, usually with no label and no explanation. It is the finance rate on your lease or subscription, and it is written that way because it makes the finance cost extremely hard to compare against anything else you have ever borrowed.
One multiplication
Multiply the money factor by 2400 and you get the annual percentage rate. That is the whole conversion. A money factor of 0.00215 is an APR of 5.16 percent. A money factor of 0.00340 is 8.16 percent. A money factor of 0.00125 is 3.00 percent, which is the sort of number a manufacturer subsidises when it wants a model off the lot.
The multiplier is 2400 rather than 1200 because of where the money factor gets applied. In a normal loan, interest is charged on the balance you still owe, and that balance falls every month. In a lease, the finance charge is applied to the sum of the capitalised cost and the residual value, which is roughly twice the average amount outstanding. Doubling the exposure and halving the effective rate cancel out, and 12 times 200 percent gives you 2400.
What the number is doing in your payment
Your payment has two moving parts. Depreciation is the part of the car you use up: capitalised cost minus residual value, divided by the number of months. Rent charge is the finance cost: capitalised cost plus residual value, multiplied by the money factor. On a car with a $30,900 cap cost and an $18,647 residual at 36 months, depreciation is $340.36 a month and the rent charge at 0.00215 is $106.53 a month.
Those two lines behave completely differently when something changes. Negotiate $1,000 off the cap cost and your depreciation falls by about $28 a month while the rent charge falls by about $2. Get the money factor cut by 0.00050 and your depreciation does not move at all while the rent charge falls by about $25. Knowing which lever you are pulling is the difference between negotiating and guessing.
Three questions worth asking
- What is the money factor on this quote, before I discuss anything else? If the answer is vague, multiply the quoted payment by 36 and compare against the sticker price yourself.
- What is the buy rate, and what has been added to it? Dealers can mark a money factor up, usually by up to 0.00040, which is about a full point of APR.
- Does a multiple security deposit lower it? Some captive finance arms reduce the money factor by 0.00007 per deposit. On a 36 month term that can be worth more than the deposits tie up.
Why we print it
Car subscriptions have a reputation for being a single opaque number with a lot of convenience wrapped around it. We publish the money factor for every car on the fleet, convert it for you on the calculator page, and show the depreciation and rent charge as separate lines. If the finance cost is defensible, showing it costs nothing. If it is not, hiding it is the only reason to keep it quiet.
Rates, residuals and money factors quoted here are sample figures used to explain the method. Your own quote depends on credit approval and the vehicle sourced.
