Leasing

Unsure what a lease money factor is and how it affects your monthly payments? Read on to learn how to calculate your lease money factor and lease for less.

8 minutes

08.04.2023

Leasing a car requires knowing several terms, including the “lease money factor.” If you’ve come across this term before and are unsure what it means, you’re not alone. However, before signing a lease agreement, you should understand how this term factors into your monthly payments.

The financing company or dealer typically sets the lease money factor. Many people don’t know that the lease money factor is negotiable and can lower your monthly payments directly. If you can reduce your lease money factor and monthly payments, you will pay less for your lease overall. You can also purchase your lease for less once your lease terminates, given the leasing company allows it.

A lease money factor, also known as a lease rate factor, lease fee, or lease factor, represents one piece of the larger lease puzzle. Like the capitalized costs, residual value, taxes, and selling price of the leased vehicle, a lease money factor determines how much you pay each month to lease the car. In fact, a lower lease money factor translates to a lower monthly payment.

Leasing companies derive a lease money factor based on the lease charge, capitalized costs, residual value, and lease term. Most lease money factors are expressed in decimal form as a percentage of the total lease cost. Lease money factors also vary between leasing companies and dealerships.

The best car leasing deals incorporate a low lease money factor into the monthly payment equation. A money factor at or below 0.0025 is typically one to look for. However, most lease money factors are around 0.003 or more, depending on your credit score.

If you’ve asked yourself how much it costs to lease a car, you may have gotten confused about the difference between interest rates and money factors. These two terms are similar but are often used in different scenarios.

For example, dealerships typically advertise new cars with a “low annual percentage rate (APR).” In this case, the interest rate represents the fee you pay for financing the vehicle. Interest payments are included in your monthly payment, but you can refinance your loan to obtain a lower interest rate and pay less interest.

A lease money factor represents a similar charge to lease a car. Leasing companies incorporate this factor into the monthly payment. The lease money factor can influence how high or low a monthly payment sits. A lower money factor means you pay less interest over the lease term.

Interest rates and lease money factors are based on your credit score. Maintain a higher credit score to qualify for a low lease money factor. Lower credit scores mean you pay more interest whether you lease or purchase a car. You can also calculate the equivalent interest rate if you know the lease money factor.

If you’re wondering if you should lease and then buy a car, it’s essential to understand the relationship between a money factor and an interest rate. Leasing companies use money factors instead of interest rates because using a decimal is a more straightforward calculation than a percentage.

However, you can convert money factors into interest rates and vice versa. Here’s the formula to do so:

Interest rate = Money factor x 2,400

To calculate a 0.0025 money factor's equivalent interest rate, multiply 0.0025 by 2,400. This calculation results in a 6% interest rate. If you’re looking for a particular interest rate, you can also reverse the formula:

Money factor = interest rate / 2,400

For a 3% interest rate, the resulting money factor would be 0.00125. You can also check your math by multiplying 0.00125 by 2,400 to get 3%.

Yes, the lease money factor is based on your credit score, similar to an interest rate. Dealerships and leasing companies use a money factor to account for the risk of leasing a car to a customer. The greater the risk, the higher the leasing company sets the money factor.

Besides converting the money factor into an interest rate for better comparison, you can calculate your resulting factor with other values listed in a lease agreement. Consider a lease agreement with the following terms:

- $750 monthly payment
- $50,000 capitalized cost
- $46,000 residual value
- 24-month lease term

The following formula demonstrates how to calculate your lease money factor:

Money factor = Lease charge / (Capitalized cost + Residual value) x Lease term

You can calculate the money factor by plugging the values expressed in the lease into the equation above.

The lease charge is the sum of your monthly payments for the life of the lease. Using the $750 monthly payment and 24-month lease term values, you can calculate your lease charge to be $18,000.

Note that leasing companies may charge additional fees, such as an acquisition or a disposition fee, on top of your monthly payment. Learn more about car lease fees to avoid and pay less for your lease.

The capitalized cost is the vehicle’s selling price. This value is not necessarily equivalent to the Manufacturer’s Suggested Retail Price (MSRP). Lease hackers know that even though you’re not buying the car you want to lease, you should still negotiate the selling price. A lower selling price and a higher residual value can affect how your monthly lease payments are calculated.

The sum of the capitalized cost and residual value is $96,000 ($50,000 plus $46,000).

The lease term describes how long a lease on a car is, often expressed as a number of months. For example, a 3-year lease is a 36-month lease term equivalent. You can divide the number of years in the lease by 12 to convert your lease term into months. In this case, the lease is already expressed as 24 months.

The lease agreement stipulates a $50,000 capitalized cost and $46,000 residual value. Add those together for a sum of $96,000. Then, multiply that by 24 months to get 2,304,000. Don’t worry, this number may seem high now, but it will help calculate your money factor in the next step.

You determined the lease charge was $18,000, and the result of multiplying the lease term by the sum of the cap cost and residual value was 2,304,000. Divide $18,000 by 2,304,000, and you get 0.0078125, which is a rough money factor of 0.0078.

Consider a lease charge of $9,000, which is half of the lease charge in our initial calculation. This change equates to a $375 monthly payment over 24 months instead of $750. Divide $9,000 by 2,304,000, and you’d determine a more favorable money factor of roughly 0.0039.

As you can see, you can easily manipulate the formula’s values to determine the corresponding money factors. Don’t be afraid to run your calculations during negotiations, either. Doing so can help you identify where you can negotiate to get a lower monthly payment and a lease you can afford.

A good money factor for a lease is around 0.0025. However, only those with near-perfect credit qualify for this favorable money factor. Most money factors are above 0.003 for lessees with an average credit score.

Most leasing companies charge customers with lower credit scores more in interest, which translates to a higher money factor. Unlike residual value, a higher money factor means you’re paying more than someone with a higher credit score and lower money factor.

You can negotiate the money factor on a lease to a point. Dealerships and leasing companies typically have a limit to how low they’re willing to, whether that’s asking price, money factor, or mileage limits. Even lessees with perfect credit can’t necessarily qualify for a money factor lower than this set limit.

Part of knowing how to lease a car online in 2023 is understanding the correlation between the money factor and your credit score. Namely, a higher credit score earns you a lower money factor. This relationship also opens the door to negotiations if you can demonstrate your creditworthiness in other ways. For example, you might negotiate a lower money factor by agreeing to a larger down payment.

Like an interest rate on a financed car, the money factor incorporated into your lease determines how much you pay in interest. You can negotiate your lease money factor, but you should do some research before you step foot on a dealership lot. When you know what goes into determining your lease money factor and how it integrates with the other lease components, you can walk away with a better lease deal.

If negotiations aren’t your thing, don’t sweat it. A FINN car subscription makes it easy to find the car you want, have it delivered to your front door, and budget for one monthly payment. When your subscription is up, simply choose another car from FINN’s extensive lineup. Set up a FINN car subscription today to see how easy it is to leave negotiations and the stress of leasing behind.