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By Staff Reporters
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An increasingly common leasing scam is the money factor lie
The “money factor” in leasing is the financing cost of a monthly lease payment and is similar to an interest rate – and it’s important to know the difference. The money factor is a small decimal and should be shown as such, whereas the interest rate is a percentage. A deceitful sales person will count on you not knowing the difference.
For example, a interest rate of 2.5% is not the same as a factor of .0025 and when the latter is used to calculate your lease payment, he or she ends up overcharging you. As a result, you have to pay much more over the lease term without realizing it.
Cite: https://www.r2library.com
To calculate the money factor, use this formula: Money Factor = Lease Charge / (Capitalized Cost * Residual Value) * Lease Term. It’s important to note that the customer’s credit score determines the money factor. The higher your credit score is, the lower the money factor on the lease will be.
One way to calculate the money factor is by converting it to an APR. To do this, you multiply the money factor by 2,400. If a car dealer provides you with an interest rate, divide it by 2,400 to find the money factor.
In another example, if you are quoted a money factor of .003 on a loan, that would be (2,400x.003) 7.2%. If the car dealer quotes you an interest rate of 4.2%, you can divide it by 2,400 to find the money factor of .00175.
The money factor may be shown in an easier-to-read format, like 1.75 instead of .00175. This can often confuse customers because it appears to be a low interest rate. But don’t be fooled by a money factor presented as a factor of 1,000. Always be sure to ask if the number you are given is the APR or the money factor. If it’s the money factor, convert it to APR so that you can clearly see the interest rate.
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Filed under: "Ask-an-Advisor", Accounting, Funding Basics, Glossary Terms | Tagged: annual percentage rate, APR, interest rate, money factor, money factor lie |
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