If you're in the market for a new car, you may have to go through the process of leasing. One important thing to understand about leases is the lease rate factor. This number is used to calculate your monthly payments, and it's essential to understand what it means. The lease factor is simply the interest rate expressed as a percentage. The Federal Trade Commission says monthly lease payments are often lower than when buying a car outright, so it's important to know how to convert the lease rate factor into an interest rate.
Shopping for new or used cars can be a hassle, and many numbers and formulas are being thrown at you during the process. It can be overwhelming to sort through it all and truly understand what you're signing on to. You can be more successful when buying a car if you know how to convert a money factor to an interest rate.
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What Is an Interest Rate?
An interest rate is the cost of borrowing money and is typically expressed as a percentage. The higher the percentage, the more expensive it is to borrow money. The Consumer Financial Protection Bureau explains that the interest rate does not include other fees added to the loan.
Leases can be a good option for some people. With leases, you're essentially borrowing the money to pay for the car over the lease term. If you want to trade in your car every few years or want to ensure you don't have to deal with the selling process, then a lease may work for you.
Lease auto loans and financing will not show an interest rate; instead, you'll see a term called the money factor. The money factor is expressed in a series of numbers following a decimal point. The smaller the number, the lower the interest rate. Make sure the calculation formula is handy when you're sitting down to lease a vehicle so that you can easily convert the money factor to an interest rate.
What Is a Money Factor?
The money factor is the decimal number that's used to calculate your monthly lease payment. To quickly know if you're getting a reasonable interest rate, you'll need to note how many zeros precede the decimal point. You'll be paying a lower interest rate if the number begins with three zeros. If the number has two zeros, you're likely paying an average interest rate, and if the number only has one zero, you're looking at a higher interest rate and may want to reconsider.
The money factor depends on a few key factors, and the first and one of the most important is your credit score. Just as with buying a new or used car, your credit will be a significant deciding factor when it comes to leasing cars. The better your credit score, the lower the money factor should be. The interest rate or money factor is greatly dependent on your credit score.
Money Factor to Interest Rate
If you're still confused about the money factor, don't worry; you can learn how to convert it to an interest rate. This calculation will give you a clear understanding of what you're paying each month. It's fairly easy to convert the lease rate factor to an interest rate. The equation to convert the money factor to an interest rate is simple: Interest Rate = Money Factor x 2,400.
For example, if your money factor is .000625, your interest rate would be .000625 x 2,400 = 1.5 percent. However, if your money factor is .00625, your interest rate would be .00625 x 2,400 = 15 percent.
Now that you understand how to convert the lease rate factor into an actual interest rate, you can make a more informed decision when it comes time to sign on the dotted line. Understanding all the terms and numbers associated with leasing or buying a car can save you a lot of money and headaches down the road.