Money Factor Refers To The Interest Charged In A Lease
When a car buyer leases a car some have little insight on what they are paying for and why. Leasing cars is similar to financing cars although theres a difference. For every year or 12,000 miles a cars driven on average its retail value depreciates approximately 10%. Therefor if leasing a car for 3 years you finance approximately 30% of the car.
If leasing a $20,000 sedan for 3 years 30% depreciation is about $6,000. This is the approximate depreciation for driving a $20,000 car for 3 years. There are other fees on a cars lease although the majority is the cars depreciation.
Lease Money Factors Vary Heres An Example At .00275
When leasing new cars the interest is refered to as money factors and are normally between .0009% and .009% The reason is money factors are factored daily not monthly as in finance interest rates. To convert to a monthly interest rate either remove the first two .00 and multiply by 24 or simply multiply the whole money factor by 2400.
If you multiply a daily money factor of .00275 by 2400 you get 6.600. 6.6% is the approximate monthly interest for a .00275 money factor. After multiplying your money factor by 2400 multiply it again by 3 to find the approximate interest charged for the 3 year lease.
Calculate Car Interest Rates From Lease Money Factors
In this example a money factor of .00275 is approximately comparable to an interest rate of 6.6%. And 6.6% times 3 is 19.8%. 19.8% is the approximate interest charged for 3 year leases at .00275. Heres an example leasing $20,000 cars for 3 years with the same money factor.
The depreciation is approximately 30% or $6,000 and 19.8% of $6,000 is about $1,200 and $7,200 over 36 months is $200. Thats a $199 lease for a full size sedan. Although theres fees such as drive off fees and taxes majority of lease payments are from a cars depreciation and money factor.