How to Convert a Money Factor to an Interest Rate

by Tim Plaehn

Although the use of money factors may seem like a way to keep you from learning the interest rate on a car lease, there is a less devious reason that lease companies and dealers use factors. A money factor plugs into a simple formula to calculate a lease payment. Without lease factors, payment calculations become very complicated.

One Conversion Rate for Any Money Factor

To find the equivalent interest rate for a money factor, multiply the factor by 2,400. For example, if the money factor is 0.00271, the math gives an interest rate of 6.5 percent. You can also go from an interest rate to a money factor by dividing the rate by the same 2,400.

Leases Function Differently Than Regular Loans

A lease payment is based on paying interest on the full lease value of the car, but the principal reduction is only the difference between the price and the residual value. When starting with an interest rate, it takes several different formulas to accurately determine a lease payment. Finance companies mathematically developed the money factor system to calculate lease payments with a single formula.

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

Photo Credits

  • photo_camera CandyBoxImages/iStock/Getty Images