I always wondered what the actual reason is for leases using a money factor instead of an annual interest rate as don’t you just multiply the money factor times 2400 to get the interest rate?
2400 x money factor is an estimate of the annual interest rate (but, very close in most cases). Some fund providers use an interest rate (e.g., FMC, Ally Bank… I think). If you need an explanation of why the MF is multiplied by 2400, please let me know.
Money factors were introduced because they’re very easy to use without having to reference annuity tables or performing calculations using financial functions in Excel or a finance calculator as is the case with interest rates.
Here’s a pretty good explanation of the finer points of interest rates and MF:
In the “Olden Days”
it was very simple for dealers to add the adjusted capitalized cost to the RV and multiply the total by the money factor. Dealers could do this simple calculation on the desktop adding machines they had before computers
I still don’t understand what is magical about 2400 that is used to convert mf to apr?
That’s just the “magic number” so you can use one calculation instead of having to know the exact balance of the lease for every single payment.
One thing wrong with Barney’s first formula… it should be…
It appears that his formula is for an ordinary annuity (payments made at the end of the period) instead of an annuity due (payments made at the beginning of the period). Thus, he is missing the factor (1 + r) in the denominator.
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It was an inelegant way of saying that’s the number necessary for calculating the average balance instead of calculating the exact balance.
The money factor is not a number that gives an estimate of the average lease balance. It’s a number used to give an estimate of the average monthly lease (interest) charge when multiplied by the estimated lease balance. The estimated lease balance is (ACC + RV) / 2. THE MF is not used to calculate estimated lease balances from one month to the next.
I understand that, but I think I misunderstood the original question. I humbly apologize for the confusion.
Sorry, I didn’t mean to come on so strong. Sometimes, I feel like I’m walking on egg shells on this website. People get easily offended. Must be a lot of young people under 40 on this site. I’m not referring to you.
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I see. Now it make sense why 2400 is used.
Next question:
Why estimated average depreciation include both Adjusted Cap cost and RV?
RV is already part of the adjusted cap cost.
In other word, if I want to get a loan, I just need to pay interest on cap cost. Why lease requires to pay interest on the SUM of cap cost and RV?
I had the same question before, but @RVguy and @max_g explained it to me. Read this thread for more information.
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It’s totally fine. I wasn’t clear and it was my fault. I’m 46, so happy to admit a mistake.
You’re not paying interest on the sum of the adj cap and the residual. Think of a lease as a balloon loan. Say you borrow $50,000 with a final balloon payment of $20,000. If it were a lease, the $20,000 is analogous to the residual value and the $50,000 is analogous to the adjusted cap. The difference is you don’t have to pay the $20,000 residual. You’re only paying the depreciation (adj cap - residual) plus interest levied on the declining lease balance starting with the adjust cap cost. At lease end, your lease balance is the residual value.
A loan has two component: principle and interest. Likewise, a lease has two components: depreciation and lease charge. Principle is similar to depreciation while interest is similar to the lease charge.
Here’s what a lease amortization schedule looks like…
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Actually, it’s not fine. I apologize.
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It is what the banks/lenders use to assume depreciation for the first two years on a leased vehicle. The reason behind they add two zeros is to complicate the variables and confused the consumers. So the next time you asked for the money factor on a certain vehicle on let’s say on a tier 1 lease. The sales person will give you digits that starts with two zeros E.g;(.00295) X 2400 is equals to 7.08% multiply it without the two zeros in the beginning and just 24, that will be (.295) X 24, the result will be the same. Those two numbers are just there to make it look like this whole factoring is rocket science. But yeah, 2400 is for 24 months or the first two years that the lenders expect your lease vehicle will depreciate. It is the same reason why dealers will never pull you out of the lease if you still have over 12 months remaining. You have to finish atlease the first 24 months, 30 even better of a 36 month lease contract to atlease break even and make the lenders get some of their money back thru money factor (interest). Otherwise, they will cook you with early lease termination fees and aquisition fees. Cheers! 
This is not correct.
MF is not tied to the depreciation amount (RV) and the 2400 is a by product of converting months (12), converting to a decimal (100), and pulling the decimal out of the average value (2).
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Can we close this now so folks who think they have the answer don’t create more confusion? And don’t bump 3 years old threads.
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