I am trying to figure out the correct way to calculate the money factor for a lease that I'm considering at this time.
A few sources have indicated the correct way being as follows:
MF = LC / [(CC+RV)*LT]
Where:
- MF is Money Factor
- LC is Lease Charge (assume $12,600)
- CC is Capitalized Cost (assume $36,000)
- RV is Residual Value (assume $25,000)
- LT is the length of the loan term (assume 36 months)
I am unsure if I am using this formula correctly. I understood the LC component to be the sum of all the monthly payments for the lease. So if the lease is $350 per month for 36 months, then the LC component is $12,600. But this doesn't really make sense on why the formula is the way it is because it would seem that the LT component technically appears in both the numerator and denominator and thus could be cancelled out. If I do cancel them out, then the LC just becomes the monthly lease payment.
To exemplify, if a dealer proposed $350 per month for 36 months; the capitalized cost is $36,000 and the residual value is $25,000, then the calculated money factor is 0.0057. It's my understand that money factor can be converted to an annual percentage rate by multiplying by 2,400. Doing so nets an APR of 13.77%.
MF = $12,600 / [($36,000+$25,000)*36 months] = 0.0057
0.0057 * 2400 = 13.77
Is this correct?
I also saw this answer here and this question, which had this very good link (I think). The formula here, as I deduced it became as follows:
DC = (CC-RV)/LT
IC = (CC+RV)*MF
MP = DC + IC
Where all of the above defined components are the same and add in the following new ones:
- DC is Depreciation Component to the monthly payment
- ($36,000-$25,000) / 36 months = $305.56 per month
- IC is Interest Component to the monthly payment
- $350 - $305.56 = $44.44 = ($36,000+$25,000) * MF
- MF = 0.0007
- $350 - $305.56 = $44.44 = ($36,000+$25,000) * MF
- MP is the monthly payment
- $ 350
When looking at it through these formulas, I found I needed to calculate the depreciation component first which was $305.56, which left a balance of $44.44 for the interest component. From that, I was able to determine that the money factor was 0.0007. Again, multiplying by 2,400 to get APR gets 1.75%.
These two methods result in wildly different answers regarding the APR (first method is 13.8% and the second method is 1.75%). I think the second method is more correct, but I'm unclear if it's fully correct. Can someone advise?
