In more detail
A lease payment has two parts. The depreciation fee is the drop in value you use up: (capitalised cost − residual value) / term. The finance fee is (capitalised cost + residual value) × money factor. Adding cost and residual and multiplying by the money factor approximates interest on the average balance, which is why money factor × 2,400 gives an approximate APR. Sales tax is usually added on top. The residual is set by the leasing company as a percentage of the car's list price.
Why it matters
A money factor looks like a tiny number, which makes it easy to overlook or mark up. Dealers can add to the lender's base ("buy") rate, so converting it to an APR and comparing it with loan rates shows whether the lease is fairly priced.
Example
A 36-month lease with a capitalised cost of $35,000, a residual of $21,000 and a money factor of 0.0025 (about 6% APR):
- Depreciation fee:
(35,000 − 21,000) / 36= $388.89 - Finance fee:
(35,000 + 21,000) × 0.0025= $140.00 - Monthly payment before tax: $528.89
Common confusion
The money factor is not a percentage; multiply by 2,400 to compare it with an APR.