Why is the money factor defined the way it is?

A lease payment is composed of an interest portion (borrowed money) and depreciation amount (purchase - residual).

The Monthly payment is then Monthly Interest Cost + Monthly Depreciation Cost

The Money Factor is used to estimate the amount of interest due in a single month of a lease so you can figure out the monthly payment.

If you are borrowing $100,000 then over the entire loan of repayment from a balance of $100,000 to a balance of $0, the average amount you owed was $50,000 (1/2 of principal).

You are repaying this loan monthly (1/12 of a year) and percents are expressed as decimals (1/100).

6 * 1/2 (for principal) * 1/12 (for monthly) * 1/100 (to convert percentage from 6% to .06) = 6 * 1/2400.

2400 is the product of 3 consecutive conversion (1/2 * 1/12 * 1/100) to convert from an interest rate to a money factor.

6/2400 = Money factor of 0.0025 which can be multiplied against the total amount being borrowed to know what the monthly interest would roughly equal.

Some Money Factor info: https://www.alphaleasing.com/resources/articles/MoneyFactor.asp

Alex's answer is very helpful. However, I would like to add why it might be convenient to use money factor instead of APR when computing lease payments. Money factor makes it easier to compute the lease payments manually.

Lease payments have two parts:

1. Depreciation Part
2. Interest Part

Here is how to calculate them:

• Depreciation Part = (Capital Cost - Residual Value) / Lease Term
• Interest Part = (Capital Cost + Residual Value) * Money Factor
• Monthly payment = Depreciation Part + Interest Part

Where,

• Capital Cost is the (negotiated) cost of the vehicle, subtracted by any down payment.
• Residual Value is the value of the vehicle at the end of the lease.
• Lease Term in months.

This is a computation that anyone can perform without any tools.

Money factor is a term coined by leasing companies to make car leasing that much more convoluted. It's basically a decimal value that you multiply by 2400 in order to arrive at your actual annual percentage rate or interest rate. Here's a really good article detailing how you can calculate your interest rate based on other criteria in your leasing contract, because most of the time you won't even be given money factor on your leasing contract

Let's do it mathematically. Since here it is pretty difficult to use formulas I saved it as an image: