Introduction to The
Money Rate Factor The formula for
calculating a lease
payment is:
(Adjusted Capital
Cost + Residual) *
Money Factor +
(Adjusted Capital
Cost  Residual) /
Lease Term
To most people this
formula means little
or
nothing. By
the end of this
article, you will be
calculating and
understanding lease
payments like you
have been doing it
your whole life. First
we will explain some
of the history of
the money factor and
then we will explain
what this formula
means.
If you ask
someone what a Money
Factor is, they will
often say that it is
related to the
interest rate, which
is true. But
it all sounds so
complex that most
people just glaze
over, nod their
heads and pretend to
understand. In
many cases, the
person trying to
explain the money
factor doesn't
really understand
what it is either.
Unfortunately, this
complicated way of
figuring the
payments scares a
lot of people away
from leasing. How
can you determine if
you have gotten a
good deal or not, if
you have no clue how
the payment was
calculated and have
no means to compare
it to an interest
rate on a loan.
The government has
passed a law called
Regulation M this is
supposed to ensure
that the lessor
gives the lessee
full disclosure on
the lease contract.
Interestingly, this
regulation does not
require disclosing
the money factor on
a lease.
We agree that it
may not be wise to
spend a significant
amount of your
hardearned money on
something you really
don't understand.
However, since
leasing could
potentially save you
thousands of
dollars, we want to
take the time to
explain the history
behind interest
calculations and the
Money Rate Factor.
Then, armed with
this knowledge and
understanding
(perhaps even more
understanding than
many of the car
salesmen you meet),
you can make an
informed decision.
The History
Behind The Money
Rate Factor
When you are
leasing a vehicle,
you can look at it
as two getting two
different loans from
the lessor.
Let's say that you
are leasing a
vehicle with a cost
of $25,000 and a
residual of $10,000
at the end of four
years. In
effect, there is
$15,000 in
depreciation on this
vehicle. Your
lease payment can be
divided into 2
parts:
 Part 1: The
$15,000 in
depreciation
over the life of
the lease is
similar to a
$15,000 loan
with a $0
balance.
 Part 2: The
$10,000 residual
is similar to a
$10,000 interest
only loan.
One way to
calculate the lease
payment is to figure a
$15,000 loan with a
zero balance, and
a $10,000 interest
only loan and add
the two amounts
together. In
this example we are
going to use 6% as
the interest rate.
Part 1:
If you plug a 4year
$15,000 loan at 6%
interest into any
loan amortization
program, it will
give you $352.28 as
a loan amount.
The "old school way"
uses simple math to
estimate a payment
using the average
balance of the loan
to separately
calculate the
interest and the
principal.
These two amounts
are added together
to get the monthly
payment.Interest
Calculation:
The average balance
for a loan that you
are incrementally
paying down to zero
will always be the
original amount
divided by 2.
So the average
balance in this case
is $7,500
($15,000/2).
Monthly interest on
$7,500 is $37.50.
Principal
Calculation:
The monthly
principal amount on
a loan that is paid
down to zero, is
simply the beginning
balance divided by
the number of
payments, or is this
case $312.50
($15,000/48).

The monthly
payment on the first
loan is $350 ($37.50
+ $312.50).
The $350 payment is
slightly lower than
the $352.28
calculated by the
loan amortization
program. This
is because we used
the Average or
Median Balance
rather than the
Constant Yield
Method used in loan
amortizations.
Part 2:
The payment on a
$10,000 interest
only loan is simply,
the amount borrowed
times the annual
interest rate
divided by 12 to get
the monthly amount.
So $10,000 times 6%
divided by 12 is $50
per month in
interest. 
Your total
monthly lease
payment would be
$400.00 ( $350 from
part 1 and $50 from
part 2).
Understanding the
Money Rate Factor
A mathematical
formula was
developed to make it
easier to calculate
monthly lease
payments, resulting
in what we call
today the Money Rate
Factor or Money
Factor. The
money factor is the
annual interest rate
divided by 2400.
An interest rate of
6% is translated
into a money factor
of .0025 (6 / 2400 =
.0025). So now
we can revisit the
formula for
calculating a lease
payment:
(Adjusted Capital
Cost + Residual) *
Money Factor +
(Adjusted Capital
Cost  Residual) /
Lease Term
The formula has
two parts:
Part 1: 
Interest
Amount:
(Adjusted
Capital Cost
+ Residual)
* Money
Factor
Interest
Amount:
($25,000 +
$10,000) *
.0025 =
$87.50

Part 2: 
Depreciation
Amount:
(Adjusted
Capital Cost
 Residual)
/ Lease Term
Depreciation
Amount:
($25,000 
$10,000) /
48 =
15,000/48 =
312.50 
Monthly
Lease
Payment 
Interest
Amount +
Depreciation
Amount:
$87.50 +
$312.50 =
$400 
Entire
Formula: 
(Adjusted Capital
Cost + Residual) *
Money Factor +
(Adjusted Capital
Cost  Residual) /
Lease Term
($25,000 +
10,000) *
.0025 +
($25,000 
$10,000)/48
= $400 
You can see that
the monthly payment
of $400.00,
calculated using the
Money Rate Factor is
exactly the same as
the $400 calculated
using the two
separate loans
concept. So
the Money Factor is
just a shortcut
method for
calculating a lease
as a combination of
a regular loan and
an interest only
loan. Now that
you understand how
it works, you can
enter into lease
negotiations
equipped with the
knowledge you need
to compare interest
rates between a loan
and a lease.
You can
calculate very
quickly, the
interest rate that
is being used on a
lease by multiplying
the Money Rate
Factor by 2400.
Since these figures
can be difficult to
multiply in your
head, take a
calculator with you
, or develop a cheat
sheet that looks
something like this:
Interest
Rate 
Money
Factor Rate 
4.0% 
.0017 
4.5% 
.0019 
5.0% 
.0021 
5.5% 
.0023 
6.0% 
.0025 
6.5% 
.0027 
7.0% 
.0029 
7.5% 
.0031 
8.0% 
.0033 
8.5% 
.0035 
9.0% 
.0038 
9.5% 
.0040 
10% 
.0042 
With this
knowledge, you
should be able to
make an informed
judgment as to how
much interest the
lessor is charging
you on a lease.
Remember the
interest rate is
negotiable.
Your lessor probably
relies on several
different financial
institutions and may
be able to get a
better rate for you
if you ask.
Determining the
Money Factor and
Equivalent Interest
Rate on a Lease
As mentioned
above, one of the
interesting things
about Regulation M,
is that it does not
require the lessor
to disclose the
money rate factor on
a lease. In
fact, we have rarely
seen a lease
contract that states
the money factor on
it. However,
all of the
information needed
to calculate the
money factor is
required to be
disclosed on a
lease. You can
use this information
to calculate the
interest rate on an
existing lease, or
to "check the math"
of a dealer who is
showing you a
proposed lease
contract.
You will need the
following pieces of
information to
calculate the Money
Factor on a lease:
 Total Rent
Charge
 Lease Term
in Months
 Adjusted Cap
Cost
 Residual
The formula for
calculating the
money factor is:
(Rent
Charge/Lease
Term)/(Adjusted Cap
Cost + Residual)
Let's assume that
a dealer shows you a
lease contract with
the following
information:
 Total Rent
Charge = $5,000
 Lease Term
in Months = 48
months
 Adjusted Cap
Cost = $31,000
 Residual =
$14,000
Money Factor =
(Rent Charge/Lease
Term)/(Adjusted Cap
Cost + Residual)
Money Factor =
(5,000/48)/(31,000 +
14,000)
Money Factor =
.00231
Interest Rate =
Money Factor * 2400
Interest Rate =
.00231 * 2400
Interest Rate =
5.544%
For this lease,
the Money Factor is
.00231 and the
Equivalent Interest
Rate is 5.54%.
We guarantee that
most lessors will be
amazed that you can
make this
calculation.
Summary
The concept of
paying interest on
two different loans
may seem odd, but
many of us have done
the same thing with
our home loans.
Maybe you purchased
a home for $200,000
but didn't have
enough for a 20%
down payment.
You put a
little down, then
realized your
lending institution
required you to pay
a "mortgage
insurance" payment
every month.
You couldn't get out
of this relatively
expensive "PMI"
unless your total
loans was less than
80% of the value of
the house.
But, viola!
You discovered you
get a home equity
loan to cover the
difference.
You take a home
equity loan  an
interest only loan 
for a few thousand
dollars and pay down
the principal so you
can get rid of the
PMI. You
figure that in a
couple of years,
you'll be better off
financially, so
you'll either try to
pay down the home
equity loan, or
you'll move to
another house
anyway. So
it's worth having an
interestonly loan
on the house to save
the PMI fee.
The same kind of
reasoning is what
convinces many
people to lease
their vehicles.
If you know
that your financial
status will be
better in a couple
of years, or if you
know you'll want to
trade in your
vehicle in a few
years anyway, then
paying down
principal on only
part of your vehicle
and getting an
interestonly loan
on the rest, may be
a very wise use of
your funds.
Now that we have
explained the
history and theory
behind the Money
Rate Factor and how
to calculate it,
hopefully it will no
longer be
"mysterious" to you,
and you will feel
empowered to
negotiate and
understand a lease
contract.
