Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

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.
Thanks,
Josh Jalopy

Dear Josh,
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 lease worksheet.

If you'd rather let a machine do the work, Bankrate's leasing 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 Auto 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

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