When you are looking to raise funds for your business, it is important to understand how lenders calculate the total cost of your loan. If you are planning on leasing or purchasing an equipment or vehicle, you will probably hear the term money factor.
Money is the cost of funding during monthly lease payments. It's similar to the interest rate for payments, but does not incorporate any specific fees, making it difficult to predict the true cost of a loan.
In this article, we will analyze what the money element is, how it works, and most importantly, how to convert interest rates into interest rates so that they can be easily compared.
How do money factors work?
A money factor, also known as a lease factor or lease fee, is essentially a funding fee. It is often expressed as a small decimal, such as 0.00125 or 0.0030. Occasionally, money factors are expressed as a coefficient of 1,000, such as 1.5 instead of 0.0015. The higher the money factor, the higher the total lease payment.
Money Factors are the most commonly used in cars Equipment Lease – Or an asset that often depreciates over time. When you place a loan, your monthly payments include depreciation, taxes and interest. Money factors determine the cost of interest.
How to calculate money factors
In most cases, lenders will provide you with a money element. However, knowing how to calculate yourself can be helpful. Knowing the money factors can help you compare lease terms and negotiate better deals.
There are two ways to calculate the money element. One through the APR and the other through information found in the lease.
APR Method
This is the easiest way to calculate your money elements – you Interest providedor APR. If you're interested, you can just divide it by 2,400. The calculation is as follows:
Money factor = Interest rate / 2,400
For example, if your lender offers an APR of 7%, the money element is:
7% / 2,400 = 0.0029
It is important to note that money factors are expressed as 1/100%. Therefore, 0.0029 corresponds to 2.9% APR.
It can be helpful to convert the money element into interest rates and compare the apple and app between two leases or loans. If you already have a money element, multiply by 2,400 to find the APR.
Lease information method
You can also find the money element by dividing the monthly lease fee by the adjusted cost of capital (excluding negotiated selling prices and fees, minus down payment or transactional credits) and residual value (expected vehicle or equipment at the end of the lease).
The formula is:
Money factor = Lease fee ÷ (uppercase cost + residual) x lease period
If you already know the money element, you can flip through this formula to find the monthly funding fee. For example, let's say you are considering leasing your equipment with the following terms:
Adjusted Cost of Capital: R50,000 Residual value: R10,000Lease period: 36 monthsMoney Factor: 0.0030
To calculate the monthly payments for a base, multiply the adjusted cost of capital and residual value by a financial factor.
(R50,000 + R10,000) x 0.0030 = R180 per month for financial fees
Interest rates and interest rates
Financial factors are primarily used for leases, while interest rates are used for loans and other types of financing. However, both serve essentially the same purpose – determining the cost of borrowing money.
One of the benefits of using money factors is that it allows for direct multiplying the adjusted capitalized costs and residual value, making it easier to calculate monthly payments. Interest rates require additional steps to convert to decimals before performing this calculation.
Financial factors and interest rates are often expressed differently. Interest rates are expressed as percentages such as 5% or 8.9%, while financial factors are expressed as decimals such as 0.00208 or 0.00297.
Money factors are primarily based on borrowers' credit scores. The stronger your credit, the lower the money factor (and the total cost of the loan). Macroeconomic factors can also affect interest rates.
How to compare money factors and interest rates
When comparing funding options, you should consider both the money factor (or interest rate) and the length of the period. Here's why:
Let's say you are comparing two lease offers for the same equipment.
Provided by 1
Offer 2
Money Factors
0.0024
0.0027
Lease period
36 months
48 months
At first glance, offer 1 may seem like a better deal due to the lower money factor. However, when you convert the interest rate to the interest rate, the picture changes.
Offer 1: 0.0024 x 2400 = 5.76% APR
Offer 2: 0.0027 x 2400 = 6.48% APR
Offer 2's APR is slightly higher, and if the lease period increases, you can make an extra 12 months of payment. This allows funding fees to be paid over the life of the lease, even when the money factor is low.
Other factors to consider when comparing lease options are:
Residual Value: High Residual Value means lower depreciation and potentially lower monthly payments. But that also means that business leases assume more risk.Mileage Limits and Fees: Most car leases come with annual mileage limits and fees that exceed these limits. Consider marages who are hoping to use these potential costs for comparison. Maintenance Responsibility: Some leases include monthly payment maintenance and repairs. Others leave the responsibility to the borrower. Early Termination Fees: If you believe that your lease needs to be terminated early, pay close attention to early termination fees for your contract.
How to hurry and help
Whether you're looking to lease equipment, secure a business loan or explore other financing options, Swoop can help you. Our platform allows you to easily compare offers from multiple lenders and find the best one for your business.
We will calculate numbers for you and provide clear and unbiased advice so that you can make the best choice for your business. With Swoop you can view available funding options, receive personalized offers, compare, and get expert guidance from our team of funding experts.
Register with Swoop Explore potential funding options within the app.
