# Why MF instead of Interest Rate?

I just looked at my monthly statement for my 72 month Tesla 3 loan…

I paid for more principal/less interest in December than January…

Granted, it’s only a couple bucks, but that seems really odd.

Check the day count, Nov-Dec is probably 30 days and Dec-Jan 31

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I thought most auto loans are simple interest (with staggered interest payment every month due to frontloading, like @mllcb42 explained) and a few are precomputed, with same interest every month. In the end, both come out same if you keep for full term.

At least that’s what I found in my research. Not sure.

A big part of the issue here is that the term “front loaded” gets misinterpreted when talking about interest.

One hears front loaded and thinks that means more interest is paid early on with less later. Front loaded actually means all the interest is precomputed and then added in up front. In those cases, you dont even start paying the principal until you have paid off all the interest for the whole term.

Front loaded/precomputed interest loans do exist, but theyre usually limited to shorter term/subprime loans. On cars, they arent even legal on terms over 60 months.

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“No payments for 90 days” is kind of this. Not the whole term interest, obviously.

Because math is hard, at least for most car salesmen and even finance guys. The math behind leases is like balloon financing, which means lots of complicated stuff with exponents and stuff. Before computers, like mortgages, car loans could be figured out using tables provided to the finance guys. Leasing has too many variables to boil it down to a few tables so they needed something different. Hence the money factor approach - a very close approximation of the actual complicated math but using only the simple stuff ( +, -, x, / ). Here’s a good explanation of the derivation of the approximation…

Nowadays, everything is automated in computers, so they could easily use the real math and get the exact results (not materially different from the MF approach). But for all the reasons mentioned above, they choose to keep the MF approach - disclosure rules, the vagueness and confusion it creates, etc.

That discussion bothers me for all of the factual issues. The math itself is good for understanding how the mf is derived, but it shows a critical misunderstanding of how leases work.

Ignoring that theyve failed to differentiate between the dealer and the lessor (which is a fairly important differentiator if you’re going to write a detailed analysis of the specifics), the whole thing seems based on the assumption that mf is used to approximate the average rent charge and average depreciation, as if those values change monthly like on a traditional loan.

On a lease, those are fixed values that do not change monthly. The amount of depreciation paid in month one is equal to the amount of depreciation paid in month 12. There is nothing that needs averaged.

Yeah, clearly written by math-types, but it’s accurate. The precise terminology of dealer/lessor/whatever is irrelevant to their audience. In reality, the depreciation and interest or ‘rent’ charges do, in fact, vary by month. The lease-life total is predetermined by the residual and the interest rate. The averaging is just a step used in the simplification process. Otherwise, you’re back to using exponential math.

They don’t from the lease language I have seen. Your adjusted lease balance decreases by the predetermined depreciation amount. When i have calculated mid lease buyouts, thats always worked just fine.

Oh, I agree that’s how the lease agreement typically works, which is written to work within the constraints of the MF simplification process. But you’d agree that higher interest charges (rent) should be accruing in the first month of a lease agreement (when your balance is the highest) vs. the 35th month (when it’s nearly paid down to the residual value)?

Why should it? It’s not a loan, it’s a rental. That’s why with say Enterprise, you rent it for a week to get the discount and return it early, they will reprice it as if it was a daily OR just go and charge you for the entire rental you didn’t use.

MF just makes it easy for the Owner (The OEM) and the Renter (You) to calculate a price.

Thats the point… that doesnt happen. It isn’t a loan so “interest” isn’t applied the same way.

Right, but the genesis of this thread is why a MF, which starts with traditional loan/interest calcs. How it’s evolved in practice is a different matter.