I'm a bit confused about the standard advice I see that the best option in a lease is to put down as little down payment as possible.

When I look at the formula for calculating the monthly payments, it appears to me that the "money factor payment portion" is dependent on the down payment amount... I.e. (copied and modified sligntly from an older post on leasing):


Lease Payment Calculation Formula:
(Cap Cost – Residual Value) / Term = Depreciation
(Cap Cost + Residual Value) X Money Factor = Money Factor Portion
Depreciation + Money Factor Portion = Base Monthly Payment

Terms Used in Lease Formula:
CAP COST = Vehicle Purchase Price (amount financed)
RESIDUAL VALUE = MSRP (window sticker) X Residual %
TERM = Length of Lease in Months (3 years = 36 months)
BASE RATE = Dealer’s Buy Rate (dealer can mark this up for profit)


If I understand it correctly, the CAP COST is the purchase price minus any down payment. That's how it is explained in this Edmunds article (see the second to last paragraph).

If that's correct, then the "interest" you are paying is lowered by the amount you put down. I.e. If I put down $2000 extra, I'm saving ($2000 x Money Factor) a month in fees -- the down payment isn't just lowering the depreciation payments.

Is that correct? If so, then why does everyone recommend putting as little down as possible?

Thanks,

---Lawrence

 

Lets see..... Hmmmm, if I put down $2k, then that is $2k I will never see again.
If I don't then I'll pay the interest on the $2K in the form of an increased monthly lease payment.
Which do you think leaves more money in my pocket in the end?
Hint: On a 36 month lease, you would need to decrease the payment by $55.55 per month to break even on the $2K down payment.
Will a $2k down payment reduce the monthly payment by $55.55 or more?
I think not.

 

The $2000 reduces the capital cost by $2000 (ignoring sales tax). So looking at the monthly calculations:

Lease Payment Calculation Formula:
(Cap Cost – Residual Value) / Term = Depreciation
(Cap Cost + Residual Value) X Money Factor = Money Factor Portion
Depreciation + Money Factor Portion = Base Monthly Payment

First of all, just in the depreciation difference you get:

Depreciation difference: -$2,000 / 36 = -$55.55

There's your $55.55 right there. Now add in the monthly 'cost':

Money Factor difference: -$2,000 * 0.0023 = -$4.60 (MF == 0.0023 is what I was just quoted)

So, I'd be lowering my payment by $60.15 and saving $4.60 per month in costs. So, an extra $165.50 in cost savings over the length of the loan.

Am I calculating that incorrectly?

-L

 

I just ran the calculations on the Lease Guide calculator and it supports my calculations:

Lease price with $1000 down: $411
Lease price with $3000 down: $347

Difference: $64

-L

 

I flunked math. That's why I bought my MINIs.

 

 

wrong wrong wrong

place to seek financial advice

 

Huh?

Am I wrong in three places, or are you just being extra adamant about me being an idiot? If the latter, please enlighten me! After all, if I'm wrong, that's what I'm trying to understand.

 

Looks to me like you have a good handle on the math..I think the triple "wrongs" are just some advice to say that NAM may not be the best place to get math advice.

Lease down payments reduce the monthly payments by the down payment divided by the lease term, plus interest just as you have calculated. You could pay the whole lease up front if you wanted to. It's all the same money. As you have calculated, the difference isn't that much money. It really comes down to how you want to handle it....all at once or over time.

Good luck!

 

Great, thanks!

-L

 

the reason people tell you not to put money down on leases is that if you were to total your car, the car and the insurance check goes to the finance company and you walk away with nothing. if you bought the car and put money down the insurance check would come to you and you would owe your bank what is left on the loan and walk away with the difference. on a lease you are basically renting the car so if you put alot of money down and total the car the insurance would go to the bank and you would lose all you down payment. also its like buying a home and renting. if buying you want to pay off the mortgage as soon as possible so u have equity in your home but if renting would you want to pay a years worth of rent up front for something you will never own. thats why you should not put money down on a lease there is no point of paying up front for something you will not own and risk losing the down payment if you were to total the car. also the 64 dollars difference x 36 months only equals $2304 which is only $304 more if you did not put the money down over the term of the lease, put the $2000 into a three year money market and i bet you can make more than $304 in interest. thats why its makes no sense in putting down money in a lease

 

"put the $2000 into a three year money market and i bet you can make more than $304 in interest"

How much is the bet?

 

ok i dont know how much money you could make with 2g in three years with todays rates but just making a point he could recover some of the money he would of saved by putting the 2g into a down payment

 

Dang, I was hoping you'd bet your limited slip.

 

That is not entirely true. There is always a payoff on a lease. If there is a total loss, the insurance company is obligated to pay fair market value for the vehicle. If you subtract the payoff from the insurance, the lessee will be entitled to the balance if positive. If negative, the lessee will owe the difference. This is the reason many leases include "gap" insurance.

A lease is not designed to have equity. It is designed to allow the lessee to only pay for the portion of the vehicle they use. When the lessee puts a substantial down payment into the lease, the front part of the lease can well have equity. This equity gets smaller the longer the lease runs and theoretically disappears entirely before the lease terminates.

 

That is why I will never lease...

 

I think the OP needs to review why he's leasing in the first place - if it's just to get an affordable monthly payment, there are other considerations he should look at too - like whether he should be buying a car he can't afford in the first place......

The reason I make this comment is that often times that's exactly the reason folks lease, and it's the wrong reason, or at least not the right one. I'm not trying to confuse here, but leasing is the most expensive way there is to finance a car if the end result is to own it. That's my point.....

If he wants to own the car in the end, leasing is the wrong way to go.

If he only wants to drive it for a while then move on to something else, leasing may makes sense, but then putting money down into the lease doesn't.

Go back to the basics, then it will all make more sense.....

And the down payment reduces your interest cost, but not the rate. Just like on a loan.....

 

For those of you that like to follow the math, current (June 2010) interest rates on a 3-year CD are about 2.5%. On a $2k deposit, that's about $180 in interest over 3 years. You might be able to make $300 on $2k in 3 years, but you'd have to accept riskier investments than CD's. You might make way less. You could in fact, "break the buck" which means you could get back less than your original $2k investment. You could get back $0. Short some stock on margin and have it go badly, you could lose the $2k and still OWE money. While the advice of "keep your money and invest it" is generally sound, it's not a sure-fire thing.

My point is that leases, being what they are, offer a fixed contract. You know you have to pay X amount to drive a car for a certain period of time. Yes, its expensive, but you are driving the most expensive part of the car (the first 2 or 3 years). If you don't plan to keep the car and you want to drive a new car every 3 years, leases are great. There aren't any surprises. No being "upside down" in the car when you are done with it.

Don't want to make monthly payments? Pay the lease up front. Don't have the $10k? Then pay over time like most people. For most folks, it isn't going to matter a whole lot either way.

If you are planning to buy the car after the lease, then it's not such a good deal. With a 3-year lease and a 3-5 year loan after that, you are effectively financing the car for 6-8 years. Ouch! That's not happy. it's effectively a 6-8 year loan. Would you finance a car for 8 years? No, you wouldn't. At least you shouldn't (not a Mini anyway).

Now get out there and have some fun driving that car!

 

Um, if I can make $304 but then have to pay $100 in income taxes...A lease offers less risk and more flexibility than purchase. And in some cases it provides tax advantages.I usually pay cash for cars but at 1.9% I'm borrowing this time. If I can't make that much after-tax I can pay off the loan.

 

I lease
Why?
Because I run my own business and I write off the lease expense. But, I don't lease new. I use leasebusters and take over somebody's car (usually with lower than normal millage). MINI I drive now, is a fourth car leased this way. Second MINI.
No money down.
Monthly payment lower than usual as original owner put the money down.
No upfront cost when taking over the vehicle.
Hell, original owner covered everything (lease transfer fees), gave me a set of almost new winter tires AND $2K in cash... Go figure!
I have two years left on this lease, and if the car shows up to be a "winner" I will buy it off for better price than a used MINI of that age will be on the street (and I know who drove the car, I did)...
If the car shows up to be a "lemon" (while still under warranty), when the lease is up I will walk away...
And get another MINI, of course...

Just another idea to be considered...

 

OP is here working out how to save $8.45 a month by paying down $2000 up front. So I think OP (that being me ) is doing *plenty* of analyzing.

I'm not doing it because of affordability issues, but because it makes the most sense for me for where I am in life.

 

So far, the main reason *against* paying extra down on a lease is just that you might lose your down payment (or whatever portion might be left) if the car is totaled before the end of the lease. I can't find any statistics on the chance of totaling one's car online, but I *do* know that I haven't totaled my current car in the ten years I've been driving it and lived in the same location. I'll admit that's a terribly small sample size, but it makes me think the odds of totaling my car over the next three years are a fair bit below 100%.

But I'll admit, saving $8.45 a month... $101 a year on $2000 is a marginal amount. Having the money sitting in the bank in case of emergencies has it's benefits.

I still haven't figured out what the value (if any) of the increased cash flow (the $64 total difference between the two lease amounts) would be for me in my particular situation -- having to use my "damp day" funds for the down payment, eager to pay down medium-rate debt (student loans and the like), etc. I suspect it will be a wash either way, but that's the next thing for me to look at.

---Lawrence

 

Ah yes, the easily overlooked factor of taxes! Thanks for pointing that out.

How do you think taxes sways the decision of extra down vs keeping it in the bank? If you pay the $2000 down, then you are paying less on the lease... keeping more in the bank. And you'd then pay taxes on the interest earned.

If you keep the $2000 in the bank and use that to pay a portion of the monthly payments, you earn interest up front before it is used up, and have to pay taxes on that interest instead.

So it looks like you'd get taxed either way. Do you think one way would lead to higher taxes than the other?

 

not only if totaled, in any situation where the insurance would have to pay for the value of the car. if stolen, natural disaster anything. im sure your a safe driver but if somebody else is at fault and totals your car you have no control over that and you would lose your downpayment over $8.45 a month when you could take that money and recoperate it if inversted properly

 

That's a cool option. One to keep in mind for the future! (And nice to know there's a way out of a lease if I need to get out of one! )

For now, though, I don't think I'd consider assuming another lease any more than I considered buying used. And that's because I ultimately want to build my own mini *just* the way I want it!

Hmmm... lower monthly payment, new winter tires and $2k in cash... sounds like you got a good deal! But I hope that doesn't mean the original lease holder got a bad deal and that's what I can expect if I need to get out of my lease!! yikes! (Lease exit is another factor I haven't completely researched yet...)