Dealer Discount vs Money Factor

One BMW dealer wanted to charge a higher MF and give a larger discount, rather than give a smaller discount and a lower MF. Both deals came out to the same monthly payment and same down ($0).

Would the dealer have wanted to charge a higher MF and give a higher discount because they were getting some bonus from BMW for a certain number of leases at a higher MF?

What other reason would a dealer want to do that?

Here’s my take. If a stealer marks up the MF on a deal I am trying to make, that is how you say a deal buster.

Not really answering my question.

Deal A
MF: .00182
dealer discount $7800
monthly payment all in $650

Deal B
MF: .00222
dealer discount: $8450
monthly payment all in $650

If the all-in monthly payment is truly the same at $650 then do I care which deal is done? However dealer expressed preference for Deal B. Why would that be?

“Would the dealer have wanted to charge a higher MF and give a higher discount because they were getting some bonus from BMW for a certain number of leases at a higher MF?”

You’re right (sort of). Here’s what I believe to be a plausible explanation…
A marked-up MF translates to more money for the dealership which is how the fund provider rewards dealers in return for a higher MF. It’s called dealer participation and is usually a percentage of the net funds advanced to fund the lease. Let’s say, for example, that the net advance is $54,000. If the amount of participation (called reserves) associated with the 0.00222 MF is 2%, then the dealership gets 2% x $54,000 or $1,080. Their rate sheet would show 0.00222 + 2% reserves. The difference between the two discounts is $650. So, in this example, the dealer would be ahead by $430 by assigning the higher MF. This means you’re losing $430 even though your payment and out of pocket expenses remain the same. The dealer might view this as a win-win situation which isn’t exactly true. It’s a zero-sum game. Their gain is your loss. I’m assuming that the 0.00182 MF is the buy rate which translates to 0% reserves.
This is just an example. Computing the actual participation amount varies among fund providers. I’m not sure how BMW does it. But, you can be certain that the dealer is benefiting.


Very well written! Thanks for the explanation.

If your fine with the monthly just go with the dealer they treated you best and has the best service dept.

Thanks, Jeff.

I get what you are saying here, but it can be a win-win, as illustrated by many of the Hackr friendly deals posted in the Marketplace, especially in BMW land from @BMW_Dave, @Samson, @GAngellBMW, et al. They are usually pretty transparent about the fact that the discount being received is not something that the dealer can or will do at the buyrate. If the additional discount is enough to offset any potential “losses” on the customer end, does it really matter to the customer that BMW gave the dealer some extra back end finance money to make it all happen, and the customer didn’t get a cut?


I think the point Delta was making is that in this scenario the customer is not getting any advantage either way and so is not a win-win situation for the deal. It’s strictly a situation where only the dealer gets more money in the end by going with the marked up MF.

In this situation, id take the buyrate instead of the greater discount. There is no incentive for the customer to get more money for the dealer…

I think the advantage that the customer is getting is the opportunity to get the car at the price being offered in the first place. That seems to be the case in particular on BMW loaners offered around these parts. I think you also see some of that structuring going on because a lot of seasoned people around here will go ahead and buy the MF down with MSDs anyway for additional savings.

I agree with you except in the case of a manufacturer who allowed MSDs and the MF on the lower discounted deal was below the amount which would allow you to max out MSDs. The application of max MSDs would allow for a lower monthly.

Deal A
MF: .00042
dealer discount $7800
monthly payment all in $650 (no MSDs)
monthly payment all in $612 with (5) MSDs at 0.00008 per MSD

Deal B
MF: .00082
dealer discount: $9000 (has to change the dealer discount to get the initial payment numbers to work)
monthly payment all in $650
monthly payment all in $582 with (9) MSDs at 0.00008 per MSD


Allot of it has to do with how the pay plans are setup in the dealership and how the managers get paid. Front end vs back end profit.

How do MSDs effect that deal (at the dealer level)? Does the dealer get rewarded in any way by getting MSDs or would they take a hit by lowering the MF?

I’ve thought about this in the past and generally I’d rather have a higher money factor and bigger discount. Why? Because the bigger the discount, the less you owe on the car, day one. Take it to the extreme: would you pay six percent interest to get a $5k extra discount, with the same lease payment as a very low money factor? The answer should be yes. If this wasn’t a BMW you might have $4k of equity the day you drove off the lot. Less owed on the car lowers your risk and gives you more flexibility to trade early, etc.


Had not considered paying a lower principal, even if you are paying a higher interest rate. It washes out in the monthly (not including MSDs). MSDs are a game changer for this scenario of the buyer can utilize it.

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Sometimes it looks better (to dealer ownership) to take a loss if you show a profit on the back end. It shouldn’t matter to you if the total cost of the lease is the same. There is no gotcha here. Just a dealer showing a loss on the front and a gain on the back instead of a loss on the front and no gain on the back. It actually costs the dealer more money to lower the price enough to offset the money factor difference as they do not get 100% of the money factor markup (70% is typical).

It’s not a zero sum game, unless you include BMW Financial in the equation. When a dealer marks up the MF, they usually get around 70% of the mark up and the lender gets the rest. So, a dealer makes less total profit if they have to share the reserve. A dealer will net the most on a given payment using the buy rate and selling for the higher price.

As mentioned above, it has to do with objectives and finance profit and finance manager pay plans, etc. The dealer is making less money overall with a marked up MF and deeper discount on the car if the payment is the same. And as mentioned above, a more deeply discounted car has a lower payoff along the way, ultimately winding up at the same residual. A car sold at a lower price will also have lower registration fees and renewals. The bird in the hand is the same payment with the higher MF and lower price.


It also lowers sales tax where it is paid on the full sales price (VA, TX, etc.)


Yes, it is a zero-sum game from the customer’s perspective who couldn’t care less how the reserve is split. Whether the dealer gets 70% and BMW gets 30%, the total is still 100% in the eyes of the customer. I think this is what you meant by including BMW Financial in the equation. I’m also assuming, for sake of simplicity, that the effective sales tax rate for both lessee and lessor are the same.

Agree- it costs the dealer to make the same payment with a lower price and higher MF. Given a choice, the customer should take the lower price because of the advantages named above.