{"id":29533,"date":"2024-04-15T16:42:06","date_gmt":"2024-04-15T16:42:06","guid":{"rendered":"https:\/\/swoopfunding.com\/us\/?post_type=blog&p=29533"},"modified":"2024-04-15T16:43:55","modified_gmt":"2024-04-15T16:43:55","slug":"how-to-convert-money-factor-to-interest-rates","status":"publish","type":"blog","link":"https:\/\/swoopfunding.com\/us\/support-for-small-businesses\/how-to-convert-money-factor-to-interest-rates\/","title":{"rendered":"How to convert money factor to interest rates"},"content":{"rendered":"\n
When you\u2019re looking for financing for your business, it\u2019s important to understand how lenders calculate the total cost of the loan. If you plan on leasing or purchasing equipment or vehicles, you\u2019ll probably hear the term money factor. <\/span><\/p>\n\n\n\n The money factor is the cost of financing on a monthly lease payment. It\u2019s similar to the interest rate on a payment \u2014 but doesn\u2019t incorporate certain fees, making it difficult to predict the true cost of a loan.<\/span><\/p>\n\n\n\n In this article, we’ll break down what the money factor is, how it works, and, most importantly \u2014 how to convert it into an interest rate so you can easily compare your financing options. <\/span><\/p>\n\n\n\n A money factor, also known as the lease factor or lease fee, is essentially the financing charge. It\u2019s often expressed as a small decimal, such as 0.00125 or 0.0030. Occasionally, the money factor is expressed as a factor of 1,000, such as 1.5 instead of 0.0015. The higher the money factor, the higher your total lease payment. <\/span><\/p>\n\n\n\n Money factors are most commonly used in car or <\/span>equipment leasing<\/span><\/a> \u2014 or any asset that often depreciates over time. When you take out a loan, your monthly payments include depreciation, taxes, and interest. The money factor will determine the cost of interest. <\/span><\/p>\n\n\n\n In most cases, the lessor will provide the money factor to you. But it\u2019s helpful to know how to calculate it yourself. Knowing the money factor can help you compare lease terms and even negotiate a better deal. <\/span><\/p>\n\n\n\n There are two ways to calculate the money factor \u2014 one is through the APR<\/a>, and the other is through the information found on your lease. <\/span><\/p>\n\n\n\n This is the simplest way to calculator your money factor \u2014 you\u2019ll need the <\/span>offered interest rate<\/span><\/a>, or APR. Once you have the interest, simply divide it by 2,400. The calculation is as follows: <\/span><\/p>\n\n\n\n Money Factor = Interest Rate \/ 2,400<\/b><\/p>\n\n\n\n For example, if the lessor is offering a 7% APR, the money factor would be:<\/span><\/p>\n\n\n\n 7% \/ 2,400 = 0.0029 <\/span><\/p>\n\n\n\n It’s important to note that money factors are expressed as 1\/100th of a percent. So 0.0029 is equivalent to 2.9% APR. <\/span><\/p>\n\n\n\n It’s helpful to convert the money factor into an interest rate to make an apples-to-apples comparison between two leases or loans. If you already have the money factor, multiply it by 2,400 to find the APR. <\/span><\/p>\n\n\n\n You can also find the money factor by dividing the monthly lease charge by the adjusted capitalized cost (the negotiated selling price plus any fees and minus any down payment or trade-in credit) and the residual value (the expected value of the vehicle or equipment at the end of the lease). <\/span><\/p>\n\n\n\n The formula is as follows:<\/span><\/p>\n\n\n\n Money factor = Lease Charge \u00f7 (Capitalised Cost + Residual Value) x Lease term<\/b><\/p>\n\n\n\n If you already know the money factor, you can flip this formula around to find the monthly financing charges. For example, let’s say you’re considering leasing a piece of equipment with the following terms:<\/span><\/p>\n\n\n\n To calculate your base monthly payment, multiply the adjusted capitalized cost and residual value by the money factor:<\/span><\/p>\n\n\n\n ($50,000 + $10,000) x 0.0030 = $180 per month in financing charges<\/span><\/p>\n\n\n\n Money factors are primarily used for leases, while interest rates<\/a> are used for loans and other types of financing. However, both essentially serve the same purpose \u2014 determining the cost of borrowing money.<\/span><\/p>\n\n\n\n One advantage of using a money factor is that it allows for easier calculation of monthly payments since it can be multiplied directly by the adjusted capitalized cost and residual value<\/a>. Interest rates require an additional step of converting to a decimal before performing this calculation.<\/span><\/p>\n\n\n\n Money factors and interest rates are also often expressed differently. Interest rates are shown as a percentage, such as 5% or 8.9%, while money factors are expressed as a decimal, such as 0.00208 or 0.00297.<\/span><\/p>\n\n\n\n The money factor is primarily based on the borrower’s credit score \u2014 the stronger your credit, the lower the money factor (and the total cost of the loan) will be. Macroeconomic factors may <\/span>also affect interest rates<\/span><\/a>. <\/span><\/p>\n\n\n\n When comparing financing options, you\u2019ll want to consider both the money factor (or interest rate) and the length of the term. Here\u2019s why:<\/span><\/p>\n\n\n\n Let’s say you’re comparing two lease offers for the same piece of equipment:<\/span><\/p>\n\n\n\nHow do money factors work?<\/span><\/h2>\n\n\n\n
How to calculate a money factor<\/span><\/h2>\n\n\n\n
APR method <\/span><\/h3>\n\n\n\n
Lease information method<\/span><\/h3>\n\n\n\n
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Money factor vs. interest rates <\/span><\/h2>\n\n\n\n
How to compare money factors and interest rates<\/span><\/h2>\n\n\n\n