What Is the Money Factor in Car Leasing?

If you're shopping for a car lease, you'll likely encounter the term "money factor." Understanding what it means can help you negotiate a better deal and avoid paying more than you should.

What is the money factor?

The money factor is the financing cost in a car lease, similar to an interest rate on a loan. It's expressed as a small decimal — for example, 0.00125. To convert a money factor to an approximate APR, multiply it by 2,400. So a money factor of 0.00125 equals an APR of about 3%.

How the money factor affects your lease payment

Your monthly lease payment is made up of two main costs:

• Depreciation charge: The portion of the car's value you're using during the lease
• Finance charge: The cost of financing, calculated using the money factor

A lower money factor means lower monthly payments. The auto loan calculator can help you estimate how money factor changes affect your payments.

How your credit score affects the money factor

Like interest rates on auto loans, the money factor a lender offers depends heavily on your credit score. Borrowers with higher scores (typically 720+) qualify for the tier 1 money factor — the lowest available. Lower scores result in a higher money factor and more expensive monthly payments.

This is why improving your credit before leasing can save you real money. The impact of credit scores on auto financing applies equally to leases.

Is the money factor negotiable?

Sometimes. Dealers can mark up the money factor above the base rate set by the manufacturer's captive finance company. You can ask the dealer for the "buy rate" (the base money factor) and negotiate from there.

Always compare the total cost of leasing vs. buying using an auto loan calculator before committing.

Tips for getting a lower money factor

• Check and improve your credit report before applying
• Meet the minimum credit score for an auto loan or lease
• Build consistent payment history to boost your score
• Lower your credit utilization before applying
• Shop multiple lenders and ask each for their best rate

Want to improve your credit score before your next lease? Start building credit with Kikoff today.