money factor & 2400

[techcopia]

What is the relationship between the money factor and 2400? What does the 24 actually represent? Is the MF some sort of semi-monthly simple interest rate (reason for the 24)?

Thanks for the great site G. I have used to educate many friends.

-Chris

[hypnotics]

If you multiply the MF by 2400 you will get the interest rate (ei: 0.002 x 2400 = 4.8% interest)

[techcopia]

If you multiply the MF by 2400 you will get the interest rate (ei: 0.002 x 2400 = 4.8% interest)

Thanks. I am more asking about the theory behind the 2400 number. Why 24? Why not 12 or 100?

I assume it has something to do with 12 months and because in the formula you are adding the cap cost and residual value together, the 24 averages the two values out resulting in an average value of the car throughout the lease term. This explanation makes sense in my head but my logic may be incorrect.

[ridewithg]

To be honest, I wish I knew. What the heck is a money factor anyway? why not call it interest rate? that's what it is, isn't it?

I'm not in finance, so i haven't figured out the relationship, when I do, I'll definitely write about it. If you guys know someone in finance, feel free to throw out that questions, maybe someone will know.

[techcopia]

Ok....with the help of wiki http://en.wikipedia.org/wiki/Annual_percentage_rate I was able to get a better understanding.

Given a simple annual interest rate of 6%..... We can divide this by 1200 (100 to move the decimal point two places to the left and by 12 to get a monthly rate).

Separately, we are taking the average of the cap cost and residual value (add the values and divide by 2). This gives us an average value of the car throughout the term. This average value is what we are actually paying interest on throughout the lease term.

Now we multiply the two equations together we have-

top half of equation---- 6% * (cap cost + residual value)
divided by bottom half of equation----- 1200*2 = 2400

so the 6% divided by 2400 equals a .0025 money factor. which we can multiply by the cap cost plus residual to get interest monthly payment.

Hopefully at least one person that reads this post will be able to understand it.

I found it interesting that since the interest payment is based off the average car value throughout the lease term, lower residual values decrease the interest payment....(but a lower residual value would increase the depreciation payment)

[delta737h]

If you multiply the MF by 2400 you will get the interest rate (ei: 0.002 x 2400 = 4.8% interest)

With all due respect, that's incorrect as I'm sure you know. Here's why...

money factor x 24 = interest rate

Example

0.00200 x 24 = 0.048 = 4.8%

0.00200 x 2400 = 4.8 which is not the same as 0.048 or 4.8%