Down Payment

Leasing Is More Than Just Monthly Payments

Published by BOUNCEwithB

My simple definition of leasing = a sometimes cheaper and easier way to get in and out of a car over a given period of time. Leasing is not for everyone. But if you do decide to join the car rotation club, you need to make sure you understand all of the costs involved in a Lease.

Let’s use a current Lease incentive of one of the most popular cars in the world. The BMW 3 series.

$429 Monthly Payment
36 Month Term
$2500 Down Payment
$450 Security Deposit
10000 Annual Mileage
Lease is based on a 2008 328i Sedan equipped with automatic transmission, Premium Package and destination charge included. Dealer contribution may affect terms.
$3379 due at signing.

Thank you Edmunds for the info above.

Monthly Note: $3,379 due at signing with $2500 being a cap cost reduction, 10k miles per year. Not too bad other than the $2500 cap cost reduction. Lets say you sign all the papers and drive off the lot. You pull 5 feet off the lot and a car broad sides you.. totaling the car. It just cost you your first monthly payment and $2500 to drive 5 feet. Don’t put money down on Leases. Back to the point… What are the hidden costs involved in this lease?

G’s Thoughts: As B says, it’s never a good idea to put money down for cap cost reduction. A lot of folks fail to understand what inception and money down is. Inception is the 1st month payment and the fees you pay at drive-off. Down payment is the money you put down to lower the price of the vehicle. You don’t put money down, period.

Insurance: BMW requires 100/300 50k property damage liability and a 1000 max deductable. For some not a big deal. For this example lets say you have a good driving history, 30 years in age, with 0 points. Your monthly insurance is $190/month.

G’s Thoughts: 100/300 is the bare minimum recommended coverage. If you own a home or any sort of property, this should be the bare minimum you should insure your vehicle anyway, unless you want to potentially lose some or all of your assets in the event of a big accident.

Lease end fee: So you were thinking you will get that Security Deposit back…. Ha. You loose $350 of it for BMW’s “disposition fee”. Of course you can get this money back if you re-lease another beemer. In this example we are not going to lease another bmw thus you lose $350 of your $450 security deposit.

G’s Thoughts: Luckily, some automakers such as Infiniti and Acura, do not charge a disposition fee nor require a Security Deposit. Acura even offers a $1500 damage waiver during turn-in. Woot!

Wear and Tear: At this point you are slated to get $100 of your security deposit back. I’d love to see a statistic of how many leasers actually get this back. Now is the time to read your wear and tear description from your leasing company. In BMW’s case… Any scratch or ding more than an inch long is considered excessive. You will now be paying full retail price to have them repaired 🙂 There are other wear and tear details that I won’t go into because each leasing company have their own guidelines. In this example lets say you only have 2 “dings” more than an inch long and they will cost $250 to repair. Oh, and that 8 inch crack along the windshield. Guess what… new bmw windshield = $700. Do yourself a favor and repair the windshield before turning in the lease. But in this example we didn’t know. Total wear and tear costs = $950

G’s Thoughts: Wear and Tear is pretty painful part of leasing. You have to literally baby your car. Just because you rent it, doesn’t mean you can mistreat it. Specially expensive cars such as the BMW. Best advice is to treat it as if you own it, who knows, you may want to buy it at the end of your lease.

Tires: This can be a wear and tear issue. But do yourself a favor. Understand now that most modern performance tires will wear out before the end of your lease and that you WILL be buying AT LEAST one new set of tires. In our example the OEM replacement tires are Bridgestone Turanza EL42 RFT’s. $900 after shipping, mounting and balancing. You “can” get away with buying a cheaper tire but some dealers have been known to make judgment calls and say that your tires are not the same quality as the OEM tires. Enter more fees.

G’s Thoughts: This is part of the reason why 24-month leases have become more and more popular. In 24 months, chances are, you won’t be paying for new tires unless you enjoy burning rubber on a daily basis.

Routine Maintenance: This can include everything from oil changes to brake pads to a new clutch. This can be a wild card depending the type of vehicle you lease. BMW is actually a pretty good car to lease in this regard. They take care of most maintenance costs for the first 4 years or 50k miles. This easily gets you through a 36 month lease. Just be careful because they don’t (I may be wrong) cover clutches if you wear one out in your 6 speed manual. For this example we have an Automatic. We will assume $0 for routine maintenance.

G’s Thoughts: Hurray for $0 cost maintenance. Audi used to have it, so did Mercedes Benz, but that is no longer the case.

Excessive Miles: This varies by company. 20 to 25 cents a mile in most cases. In our example we will assume that we are not going over our allotted 10k miles/year.

Summary:

$465.47/month x’s 36 = $16,756.92 monthly note including a 8.5% sales tax

+ $2,500 down payment (don’t do it)

+ $900 in licensing, acquisition, other local county/state fees

+ $190/month x’s 36 = $6840 insurance

– $450 security deposit we get back at lease end

+ $350 disposition fee at lease end

+ $950 wear and tear

+ $900 new tires

+ $0 routine maintenance

+ $0 excess miles

= $28,746.92

Now in saying all of this and being overly naive with the example above… I have leased my last 5 cars and will continue to do so. What have we learned? Don’t put money down on a lease, know the costs involved in insuring your new lease, take into account lease ending fees, take care of wear and tear issues yourself as soon as they occur, replace worn tires yourself with a cheaper but comparable name brand, find a car maker that has a maintenance warranty built in to the price of the car (or at least find a car that requires little maintenance), and plan out ahead the number of miles you will drive in a lease. Some companies (BMW included) offer the option of buying additional miles at a discounted rate up to half way through your lease term.

G have I missed anything?

G’s Thoughts: You got it B! The leasing experience will be as good as you make it. If you get ripped off for not reading the fine print, or not doing your research. You kind of deserve it. Take care of your lease as if you own it and you will not have any problems. Lastly, nationally advertised deals on TV are the worse because they are based on MSRP pricing. Best deals you can cut are the ones you do yourself.

The Lease Down Payment Dilemma

Published by G

4/24/2008

So I received an email from a reader explaining the whole down payment dilemma in a very detailed and extremely convincing manner. It has, changed my view of down payments. I’m not saying I’d put down a large down payment, but if you got it, why not, specially if the interest is high on the vehicle you plan on leasing. Also, I do recommend everyone to call their insurance agents and find out how their policies treat leases.

So here are excerpts of the email sent by Damien from D.C.

“So I called my insurance company, Geico, and asked them about it. They report that their payout for a claim doesn’t rely on how the car was financed. That is, if they determine it is a $27k payout and residual value is $20k and you owe nothing, then you would get your $7k in cold hard cash.

I think what you are giving up is the GAP protection. In our example, you lost $3k. That would be the maximum you could lose, because there are no remaining lease payments and therefore there is no gap to protect.

Look at the other direction, where you pay $1000 to drive off the lot. In this case, your remaining lease payments are around $11k. The residual + the remaining lease payments is $29k, and the insurance company pays off $27k. This leaves a $2k gap, which the lease (if it includes GAP protection) would cover. In this case you only lost $1k, not $3k.

So it is a gamble, but not for the down payment amount. The gamble is for the gap, or depreciation. The depreciation is the highest when you drive off the lot, and should be $0 after your last lease payment.”

There you have it folks, I couldn’t have said it better myself. Props to Damien for this insightful email.
Now I gotta call my insurance agent tomorrow 😛

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Lately, I have been putting a lot of thought into the down payment. Generally, I don’t advise people to put down a lot for their initial drive off costs since in the event the car is stolen/totalled, you will lose all that is put towards the car. That typically happens because GAP coverage from either your insurance or the leasing bank only covers your remaining payments. However, I have been analyzing the financial effect of paying a down payment and it makes a lot of sense (assuming you never get your car stolen or totalled). Take this for instance, lets say I want to lease a vehicle that at a cap cost of $30,000. The residual value is $18,000 (60%) after 36 months This would mean your depreciation fee you are paying is 12,000, which you will finance at a rate of say .00101 or 2.42%, then of course, you pay your sales tax every month. Now lets say you put down 10,000 dollars, lowering your cap cost to $20,000, which makes your effective depreciation fee $2,000. This pretty means that you are being charged interest and sales tax on $2,000 versus $12,000, saving you a bunch over time.

Of course all of this comes at a risk. Get the car stolen or totalled in an accident, you lose the $10,000 in a flash. So, are you the gambling type?