How on earth is money factor x2400 equivalent to an APR?

allenness

I'm just trying to wrap my head around this... everywhere you look, it says to calculate lease APR, you multiply Money Factor by 2400. Ok... so if a money factor is 0.002, that's supposedly 4.8%. That means if you lease a car that depreciates 5,000 over 36 months, a typical loan with 4.8% APR you would end up paying $5,378 over the life of the loan, of which $378 in interest. But a lease with a 0.002 Money Factor results in a whopping $3,500 interest ("rent charge"), which is nearly 40% APR. How does this make any sense? Just mind boggling...

kyfdx

You aren’t financing the depreciation.

The bank buys the car, then rents it to you. Just like a loan, you are “borrowing” the full purchase price.

allenness

Thanks - I understand that's how it "works", but it seems really unfair to pay interest on the full value of the car, if I'm only using a small portion of its value and turn it in after 36 months. I don't know that you can compare it to a regular loan because the faster you pay off a regular loan, the less interest you pay. With a lease you don't even have that option because not only is interest calculated upfront, spread evenly over the lease term, but it's also based on the full value of the car. I feel like residual value shouldn't be part of the picture. Just my opinion

kyfdx

allenness said:

Thanks - I understand that's how it "works", but it seems really unfair to pay interest on the full value of the car, if I'm only using a small portion of its value and turn it in after 36 months. I don't know that you can compare it to a regular loan because the faster you pay off a regular loan, the less interest you pay. With a lease you don't even have that option because not only is interest calculated upfront, spread evenly over the lease term, but it's also based on the full value of the car. I feel like residual value shouldn't be part of the picture. Just my opinion

A lot of "feelings" here. It's a lot closer to a regular loan than how you see it.

You borrow the full price of the vehicle, and pay the "loan" down at a rate that causes the "loan balance" to equal the residual amount, at the end of the lease term.

Also, the finance charges are applied to an average of the CAP cost and the residual, so even though the finance charges are paid evenly throughout the life of the lease, you aren't paying finance charges on the full CAP cost for the term.

MF X 2400 is a rough approximation of the APR, but it's still pretty close.

allenness

I hear ya. It's just painful to see depreciation of $4,950 and 'rent charge' of almost that much ($4,500) on a 2021 Rogue I just leased. I'm sure market conditions narrowed this gap as well, but man...

Thanks again.

kyfdx

allenness said:

I hear ya. It's just painful to see depreciation of $4,950 and 'rent charge' of almost that much ($4,500) on a 2021 Rogue I just leased. I'm sure market conditions narrowed this gap as well, but man...

Thanks again.

Congrats on the new car!

allenness

Thank you! I have to say, despite the dealership probably making massive profit on the sale, it was the quickest, smoothest process ever - I exchanged a few messages, made an offer via email, dealer accepted, the next day I was in and out of the showroom with the new car in less than 1 hour.

Appreciate what you guys do here.