Frequently Asked Questions
Answers to common questions about car loans, leases, and auto financing.
What is a money factor?
A money factor is the interest rate equivalent used in car leasing. It's typically expressed as a very small decimal number (e.g., 0.00250). To convert a money factor to an approximate APR, multiply it by 2,400. For example, a money factor of 0.00250 × 2,400 = 6.0% APR. Conversely, to convert APR to money factor, divide by 2,400. The money factor is used to calculate the "rent charge" or finance portion of your monthly lease payment.
Should I lease or buy a car?
The lease-vs-buy decision depends on your personal circumstances and priorities. Here are balanced considerations for each option:
Leasing May Be Better If:
- You prefer lower monthly payments
- You like driving a new car every 2-4 years
- You drive fewer miles than typical lease limits
- You want to avoid long-term maintenance costs
- You can use the vehicle for business (potential tax advantages)
Buying May Be Better If:
- You plan to keep the car for many years
- You drive more than typical lease mileage limits
- You want to build equity in the vehicle
- You prefer the freedom to modify or sell at any time
- You don't want ongoing monthly payments after the loan is paid off
What is a residual value in a lease?
The residual value is the leasing company's estimate of what the vehicle will be worth at the end of the lease term. It is typically expressed as a percentage of the MSRP. A higher residual value means the car is expected to depreciate less, which results in lower monthly lease payments (since you only pay for the depreciation during the lease). Residual values vary by make, model, and lease term.
What is a cap cost reduction?
A capitalized cost reduction (cap cost reduction) is a down payment or upfront payment made at the start of a lease that reduces the total amount being financed. This lowers your monthly lease payments but does not build equity in the vehicle. A larger cap cost reduction means lower monthly payments, but you should consider that you won't get that money back at the end of the lease.
How does sales tax work on a car lease?
Sales tax on car leases varies by state. In most states, you pay sales tax on the monthly lease payment (not on the full vehicle value). However, some states require tax on the full selling price upfront, and others apply tax on the total of lease payments. Check your state's specific rules or consult a tax professional.
What is APR and how does it affect my loan?
APR (Annual Percentage Rate) is the yearly cost of borrowing money, including interest and certain fees. A lower APR means you pay less in total interest over the life of the loan. Even a small difference in APR can significantly affect your monthly payment and total loan cost, especially on longer-term loans. Shop around with multiple lenders to get the best rate.
How does my credit score affect car loan rates?
Your credit score is one of the primary factors lenders use to determine your interest rate. Borrowers with higher credit scores (typically 720+) qualify for the lowest rates, while those with lower scores may face higher rates or may need a co-signer. Improving your credit score before applying for an auto loan can save you thousands in interest over the life of the loan.
What loan term should I choose?
Shorter loan terms (36-48 months) typically have lower interest rates and less total interest paid, but higher monthly payments. Longer terms (60-84 months) have lower monthly payments but more total interest over time. While a longer term can make a more expensive car "affordable" on a monthly basis, it's important to consider that you may owe more than the car is worth (negative equity) for several years.
Disclaimer: The information provided on this page is for general informational purposes only and does not constitute financial advice. All calculations are estimates. Consult a qualified financial professional before making car financing decisions.