Money Factor Background
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Money Factor Background: A Mathematical Proof
 Notations  C: The total loan amount. In the case of an auto lease, this is the car price.
 F: The residual value.
 r: The monthly interest rate. If the annual interest rate is R%, the monthly interest rate r is R/1200.
 N: The term, or the number of months of a lease.
 P: The monthly payment.
The monthly payment formula for a lease is given by:

When and , one can write:

Using the above expression, the average interest paid per month can be written as:

Since , one can rewrite the average interest payment as:

Hence, the Money Factor can be used to conveniently and reliably estimate the average interest rate on loans.

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