When it's time to negotiate a lease on new car, few items appear quite as mysterious as the money factor. It probably won't appear on your lease contract, and there's a good chance your salesperson may not even know what it is, but understanding the money factor's role in your lease may provide the leverage to negotiate a better deal.
What is a money factor?
A money factor, which is sometimes called a lease rate or lease rate factor, is the lease payment of your vehicle represented as a percentage of the car's total cost. It is usually written as a decimal number, like 0.00234, rather than as a percentage - like 0.234 percent. The higher the money factor, the higher your lease payments will be.
Comparing money factors to interest rates
While a money factor isn't quite the same as the interest rate on a loan, you can easily determine a money factor's interest rate equivalent by multiplying it by 2400. For example, if you have a money factor of 0.0021 and multiply it by 2400, you get 5.04. So 0.0021 is equivalent to 5.04 percent APR interest. A money factor of .0052 is the equivalent to 12.48 percent APR interest, which would not be as favorable of a rate.
The conversion factor is always the same, regardless of what your lease term might be. Whether your lease is for 24 months or 48 months, use the conversion factor of 2400. To convert an interest rate to an equivalent money factor, divide the APR interest rate by 2400.
Why money factors vary
There are three factors that can affect a money factor. First, just as interest rates can differ from one bank to another, different financing companies can offer different automotive lease rates. Secondly, your credit score can affect the money factor. Someone with a good credit score should get a lower money factor on a lease compared to someone with a poor credit score. A third item that can affect the money factor is the dealer's commission or markup, which is often called a reserve, or a buy rate/sell rate.
Negotiating a better lease rate
The lease rate is certainly not the only number you should be looking at. The car's sale price and its residual value at the end of the lease should be examined too. However, savvy consumers will research competitive lease rates before making a deal. Simply ask what money factor is being used to determine your lease payments. It's not uncommon for the salesperson not to know what the car lease rate is; however, the financing manager at the dealership or lease provider should know what it is.
If the number appears to be high compared to other dealers, ask for a quote from another financing company. The dealer may be working with a company that offers the dealer a better incentive than others, but that doesn't necessarily mean they can't get you a quote from a second source.
You should also know that the dealer's commission can often range from one to six percent of the sale price. So, for a $25,000 vehicle the dealer could be making up to $1,500 more on the sale than if you had bought it by financing it yourself through a car loan at the bank or through another independent lender.
When you finalize the lease, don't expect the money factor to be included in the contract. However, you should see the total of finance charges included. The higher your lease rate is the more the total finance charges will be.