Money Factor Formula

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.

Glossary

Units » Time » Month (sidereal)

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