The money factor is the single most useful number on a lease sheet and the one most often left off it. It is a small decimal, usually something like 0.00175, and it looks deliberately opaque. It is not. It is an annual interest rate divided by 2400.
To read it, multiply by 2400. A money factor of 0.00175 is 4.20 percent APR. A factor of 0.00250 is 6.00 percent. A factor of 0.00312 is 7.49 percent. That is the whole conversion, and it works in both directions: divide an APR by 2400 to get the factor a lessor should be quoting you.
Why 2400 and not 1200
Because the rent charge is calculated on the capitalised cost plus the residual, not on a declining balance. That sum is roughly twice the average amount you have outstanding over the term, so the factor has to be half of what a monthly rate would be. Hence 2400 rather than 1200. You do not need to hold that in your head; you only need the multiplication.
What the factor actually does is set the rent charge: capitalised cost plus residual, times the money factor, equals the monthly rent charge. On our sample cargo van, that is $40,150 plus $23,112, times 0.00175, which is $110.71 a month.
Where the rest of the payment comes from
The other half of a lease payment is depreciation: capitalised cost minus residual, divided by the term. On the same van, $40,150 minus $23,112 is $17,038, over 36 months, which is $473.28 a month.
Add the two and the payment before tax is $583.99. That is the whole calculation. There is no third component and no discretionary adjustment, which is exactly why a lessor showing you both lines is a lessor you can check.
Two things the factor will not tell you
First, a low factor with an inflated capitalised cost is not a good deal. Negotiate the capitalised cost first and the factor second, in that order, because the capitalised cost drives both halves of the payment.
Second, the residual is set by the lessor, not by the market, and a generously set residual lowers your payment while raising the lessor's risk. That is fine for you, but it means a comparison between two quotes is only meaningful if the residual percentage and the term are identical. Compare like with like, or compare total of payments.
- Money factor times 2400 equals APR
- Rent charge equals (capitalised cost + residual) times money factor
- Depreciation equals (capitalised cost - residual) divided by term
- Compare quotes on residual percentage, term and total of payments, not on the monthly figure alone
Every figure in this piece is a sample figure for a demonstration site, and the converter on our lease calculator runs the same arithmetic live so you can put your own numbers through it.
