Can someone please explain the money factor on a lease and how it relates to the actual lease rate?
06-05-2002, 09:30 AM
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Here's how a lease works....
The bank is renting you a car they have bought.
You lease payment is calculated by taking the selling price (capitalized cost) minus any downpayment (cap cost reduction) and subtracting from that number what the bank thinks the car will be worth X months from now (the residual).
The difference between these 2 numbers (cap cost and residual) is called depreciation...it represents the lost value of the car due to usage. It is a guess, a bet even, if you will.
the bank then takes the depreciated amount and adds a finance charge, also called a rent charge.
This is where the money factor (m.f.) comes in. A m.f. is a way of expressing a finance rate, it is different in that it is not calculated annually like a retail finance rate ( or APR = annual precentage rate). The lower the rate, the lower the finance charge. Look at you credit card statement, it has a rate expressed like .000235345345 (I made that number up) because it too is calculated on an AVERAGE DAILY BALANCE - a lease works the same. You can take a m.f. and multiply it by 2400 and arrive at an approximate APR..for example, a typical lease rate is .00265, multiply that by 2400 and you have 6.36%, it's right give or take a small margin of error.
So, we take our Depreciated amount and add our Rent charge, divide those by the Term (ie 36/39/42 months) and voila, thats the payment!
Expressed as a formula:
Cap Cost-Cap Reduction-Residual=Depreciation+Rent/Term=Payment
Hope that helps!!
Matt
You lease payment is calculated by taking the selling price (capitalized cost) minus any downpayment (cap cost reduction) and subtracting from that number what the bank thinks the car will be worth X months from now (the residual).
The difference between these 2 numbers (cap cost and residual) is called depreciation...it represents the lost value of the car due to usage. It is a guess, a bet even, if you will.
the bank then takes the depreciated amount and adds a finance charge, also called a rent charge.
This is where the money factor (m.f.) comes in. A m.f. is a way of expressing a finance rate, it is different in that it is not calculated annually like a retail finance rate ( or APR = annual precentage rate). The lower the rate, the lower the finance charge. Look at you credit card statement, it has a rate expressed like .000235345345 (I made that number up) because it too is calculated on an AVERAGE DAILY BALANCE - a lease works the same. You can take a m.f. and multiply it by 2400 and arrive at an approximate APR..for example, a typical lease rate is .00265, multiply that by 2400 and you have 6.36%, it's right give or take a small margin of error.
So, we take our Depreciated amount and add our Rent charge, divide those by the Term (ie 36/39/42 months) and voila, thats the payment!
Expressed as a formula:
Cap Cost-Cap Reduction-Residual=Depreciation+Rent/Term=Payment
Hope that helps!!
Matt
06-05-2002, 09:39 AM
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Having some formal math background
I must say that this common 'simplified' formula is good only for very rough estimates. I can result in an error of 10 bucks magnitude (ie anywhere from +50 to -50).
The accurate way of computing the monthly payment based of PV (present_value = cap_cost - downpmt), FV (residual), rate and term involves some exponentiation and is not linear by any means.
Luckily for many people, Excel has the built-in formula called PMT, which take exactly these four parameters and spews out monthly payment.
The accurate way of computing the monthly payment based of PV (present_value = cap_cost - downpmt), FV (residual), rate and term involves some exponentiation and is not linear by any means.
Luckily for many people, Excel has the built-in formula called PMT, which take exactly these four parameters and spews out monthly payment.
06-05-2002, 09:53 AM
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Rent = interest, that's what the whole money factor thing is and taxes in CT are done as sales tax
on the payment..ie after a payment is derived from the above formula, therefore a 399 payment is 399*1.06=422.94. There is also tax on the cap cost reduction if applicable, and here in CT there is personal property tax...thats why I didn't go into taxes, they are different in every state...and calculated differently.
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06-05-2002, 09:55 AM
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Neither answer is fully correct ...
MattK is correct in stating that the lease payment is equal to a depreciation charge plus a financing or "rent" charge. However, he doesn't fully state how these charges are calculated. It's actually quite easy:
From your dealer, get the residual percentage and the money factor for the particular lease in which you are interested (correct model, no. of months, mileage allowance).
Multiply the residual percentage by the MSRP (not the negotiated price) to get the residual.
Then, calculate:
Capitalized Cost = Negotiated Price - Down Payments (including any incentives)
Payment =
(Cap Cost - Residual)/(# Months) +
(Cap Cost + Residual)*(Money Factor)
The first term is total depreciation divided by number of months - that seems obvious.
The second term is exactly how the finance charge piece is calculated. A loan amortization formula is NOT used. Rather, think of it this way. The bank loans you (Cap Cost) dollars and gets back a car worth (Residual) dollars. On average, they've loaned you (Cap Cost + Residual) / 2.
Multiply this by an annual interest rate and divide by 12 to get the monthly finance charge.
(Cap Cost + Residual) * (Rate) / (2 * 12)
Thus, the money factor is essentially the effective interest rate divided by 24 (or 2400 is you don't like your percentages in decimal form).
That's the reason behind the 24 or 2400 factor.
Note once again that amortization is NOT applied. They use this simplified formula instead.
To this, you must add sales tax, which differs from state to state.
In NY, sales tax is due up front, on the combined total of all your upcoming lease payments.
In other states, the payment is taxed monthly, added into the overall payment.
In certain states like NJ, only the depreciation portion of your payment is taxable, not the finance charge portion.
Finally, some places like Illinois charge you full sales tax on the negotiated price of the car!
From your dealer, get the residual percentage and the money factor for the particular lease in which you are interested (correct model, no. of months, mileage allowance).
Multiply the residual percentage by the MSRP (not the negotiated price) to get the residual.
Then, calculate:
Capitalized Cost = Negotiated Price - Down Payments (including any incentives)
Payment =
(Cap Cost - Residual)/(# Months) +
(Cap Cost + Residual)*(Money Factor)
The first term is total depreciation divided by number of months - that seems obvious.
The second term is exactly how the finance charge piece is calculated. A loan amortization formula is NOT used. Rather, think of it this way. The bank loans you (Cap Cost) dollars and gets back a car worth (Residual) dollars. On average, they've loaned you (Cap Cost + Residual) / 2.
Multiply this by an annual interest rate and divide by 12 to get the monthly finance charge.
(Cap Cost + Residual) * (Rate) / (2 * 12)
Thus, the money factor is essentially the effective interest rate divided by 24 (or 2400 is you don't like your percentages in decimal form).
That's the reason behind the 24 or 2400 factor.
Note once again that amortization is NOT applied. They use this simplified formula instead.
To this, you must add sales tax, which differs from state to state.
In NY, sales tax is due up front, on the combined total of all your upcoming lease payments.
In other states, the payment is taxed monthly, added into the overall payment.
In certain states like NJ, only the depreciation portion of your payment is taxable, not the finance charge portion.
Finally, some places like Illinois charge you full sales tax on the negotiated price of the car!
06-05-2002, 09:57 AM
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You're correct, again, I tried to explain it in layman's terms as it is fairly complex and clearly a
matter of confusion to many ppl, thats why I reduced the variables by not explaining how the residual is arrived etc...
Refer to the original question, " Can someone please explain the money factor on a lease and how it relates to the actual lease rate? " I tried to answer that in terms of how MF related to a lease price in the overall picture, not write a vade vecum on leasing..
Refer to the original question, " Can someone please explain the money factor on a lease and how it relates to the actual lease rate? " I tried to answer that in terms of how MF related to a lease price in the overall picture, not write a vade vecum on leasing..