||Ask Dr. Don
Figuring out the money factor in a lease
Dear Dr. Don,
Do you know what the money factor is for September
2003? I know that the money factor for August 2003 is .0015. This
is for auto leases.
Auto leasing companies use a money factor to determine the interest
expense on a lease. The money factor will vary between leasing companies
and isn't industry-wide. So I can't tell you what the money factor
is for a particular month or company.
Money factors are used in lieu of an interest rate
for fairly arcane reasons. When you lease an automobile, the total
lease payments has to cover the difference between the capitalized
cost of the vehicle and its residual value. That's a fancy way of
saying you're paying for the difference in value between when you
start the lease and when you turn the car back in.
The lease payment also has to cover the interest expense
associated with the leasing company loaning you the remaining negotiated
capitalized cost of the car less any principal repayment over the
lease term. The money factor is a number that calculates the interest
expense associated with the lease. Multiply the money factor by
24, or 2400 depending on if it is expressed as a decimal or a percent,
to convert the money factor into an approximate annual percentage
rate (APR). So your money factor of .0015 translates to an interest
rate of 3.6 percent -- a darn good rate. If you want to see exactly
how the money factor goes into your lease payment, see this Bankrate
If you'd rather let a machine do the work, Bankrate's
calculator will calculate your lease payment. Knowing the money
factor allows you to estimate the APR on your lease and negotiate
a lower money factor if that rate is excessive. To learn more about
the pros and cons of leasing your next car, check out Bankrate's
Home Page and the Federal Reserve Board's consumer guide Keys
to Vehicle Leasing.
Finally, the Consumer
Leasing Act spells out the lessor's required consumer disclosures
in addition to any required under state law.
-- Posted: Sept. 26, 2003