Understanding the Dealer's Money Factor and Residuals in Car Leasing

These two items are instrumental in every car lease written, you have to know what these two things are. The money factor is the interest rate on the money borrowed. Once you find out what the money factor is, you can find out what the effective interest rate is. Let's say the money factor is .00178. You need to multiply that number by 2,400 and it will give you the interest rate, which in this case would be 4.272%, which is a good rate.

The residual is a percentage of the vehicle that you are not paying for - remember, on a car lease you are only paying for the portion of the car you use. The residual is typically around the 50% area on a 3 year lease. The longer a lease you do, the lower the residual will be. Every car has different money factors and different residuals. The residual is a guaranteed value the vehicle will have at the end of the lease. If you buy the car at the end of the lease, you can buy it for the residual value.

The dealer has to disclose the residual in dollar figures, but make sure you ask what percentage it is. The percentage also changes depending on the mileage you select to drive a year. If you only do a 10,000 mile a year lease, your residual will be higher than if you do a 12,000 or 15,000 mile a year lease.

The dealer doesn't have to disclose the money factor on a lease contract, but does have to list how much money you will spend on interest over the life of the lease. This is called the "rent charge" on a lease contract. This is where the dealer makes most of the money on a lease. Because most people don't understand money factors and how to calculate them, the dealers have a field day.

The dealers mark up the money factors just like they do in traditional financing. If the "buy rate" for the money factor is .00178, they may write the lease with a money factor of .00378. If they do this on an $80,000 car, they will make a ton of money on the back end of the deal...to the tune of $9,100, all of which is profit. No wonder they always try to switch someone to a lease.

You have to find out what the buy rates are for the car lease you are looking at doing. You need to have the dealer show you their financing sheets, just like you would on a financing deal. It's the same set up. Don't take the dealer's word for it... have them show you in black and white the breakdown of tier one, tier two and so on. This is the only way to make sure you are not being ripped off.

For more information, contact a finance expert at Edmunds.com.