# Why is the money factor defined the way it is?

In some loan situations, especially car leases, people like to talk about the money factor, which is a number given by

interest percentage/2400


Where does the 2400 come from? I understand that it is the universal number to use, however I would like to know why that number?

• A relevant link. One could probably go through everything they're doing in that link and convert it into algebra. – Micah Nov 19 '14 at 18:32
• Note that when you google "money factor", you get a lot of pages defining it as "interest rate divided by 2400" (that is, this is a genuine piece of terminology, which always means what the OP wants it to mean) and pretty much no page that actually says why -- you can reverse engineer it from the link I left, but it takes a bit of work. This may be more on-topic in Money.SE than it is here, but I think it's a perfectly reasonable question. – Micah Nov 19 '14 at 20:04
• I think it is a reasonable question. The quick answer is that it comes from $2400=2 \cdot 12 \cdot 100$ The $100$ is converting percentage to decimals, the $12$ is converting yearly interest o monthly interest, and the $2$ is to get the average principal balance over the loan. You are multiplying the sum of the starting value and the ending value by this, so dividing by $2$ gets you the average, which you then charge interest on. – Ross Millikan Nov 19 '14 at 20:25

A lease payment is composed of an interest portion (borrowed money) and depreciation amount (purchase - residual).

The Monthly payment is then Monthly Interest Cost + Monthly Depreciation Cost

The Money Factor is used to estimate the amount of interest due in a single month of a lease so you can figure out the monthly payment.

If you are borrowing $100,000 then over the entire loan of repayment from a balance of$100,000 to a balance of $0, the average amount you owed was$50,000 (1/2 of principal).

You are repaying this loan monthly (1/12 of a year) and percents are expressed as decimals (1/100).

6 * 1/2 (for principal) * 1/12 (for monthly) * 1/100 (to convert percentage from 6% to .06) = 6 * 1/2400.

2400 is the product of 3 consecutive conversion (1/2 * 1/12 * 1/100) to convert from an interest rate to a money factor.

6/2400 = Money factor of 0.0025 which can be multiplied against the total amount being borrowed to know what the monthly interest would roughly equal.

Some Money Factor info: https://www.alphaleasing.com/resources/articles/MoneyFactor.asp

• The quote "to know what the monthly interest would roughly equal" is a little vague. Important to say "monthly interest" here is "the percentage of the full loan amount for the average monthly interest payment", and isn't the "monthly interest rate". Money factor X total loan amount = avg monthly interest payment. That's much different than (well, half of) the actual interest rate. 0.0025 * 12 is 3, not 6, eg. You have why - money factor computes the average monthly rate over the life of the loan, and interest drops as principle is paid - but it's a tricky distinction. – ruffin Jul 22 '18 at 13:25

Alex's answer is very helpful. However, I would like to add why it might be convenient to use money factor instead of APR when computing lease payments. Money factor makes it easier to compute the lease payments manually.

Lease payments have two parts:

1. Depreciation Part
2. Interest Part

Here is how to calculate them:

• Depreciation Part = (Capital Cost - Residual Value) / Lease Term
• Interest Part = (Capital Cost + Residual Value) * Money Factor
• Monthly payment = Depreciation Part + Interest Part

Where,

• Capital Cost is the (negotiated) cost of the vehicle, subtracted by any down payment.
• Residual Value is the value of the vehicle at the end of the lease.
• Lease Term in months.

This is a computation that anyone can perform without any tools.

Money factor is a term coined by leasing companies to make car leasing that much more convoluted. It's basically a decimal value that you multiply by 2400 in order to arrive at your actual annual percentage rate or interest rate. Here's a really good article detailing how you can calculate your interest rate based on other criteria in your leasing contract, because most of the time you won't even be given money factor on your leasing contract