Putting money down on a lease seems like a bad idea
05-23-2006, 12:10 PM
#1
New Member
Thread Starter
Join Date: Jun 2003
Posts: 82
Likes: 0
Received 0 Likes
on
0 Posts
Putting money down on a lease seems like a bad idea
I have seen a lot of leasing deals and questions on this board and haven't seen anyone discuss putting money down. I will probably get a lot of disagreement on this but I believe that putting any cap reduction into a lease is a bad idea.
This transfers risk to you that you may not have thought about. To illustrate, let's say you have a $50,000 cap cost and you put $5,000 down. Now realizing that the car will depreciate 20% when you drive it off the lot, the vehicle is immediately worth only $40,000 the day after you leased it.
So let's say your car is involved in an accident a couple of months later and is totaled. The insurance company will pay off the book value of the car to the leasing company. And gap insurance or a gap waiver (which is actually far more common) will handle the difference between what is owed to the leasing company and the book value of the car. Guess where your $5,000 down payment went? It went poof into the depreciation portion of the car that is now history. So you need another car and your cash is gone.
The same thing would apply if the car is stolen, or burns up in a house fire, or swallowed in a flood, etc...
And it kills me that people talk about their low monthly lease payment when they put down a ton of money. In reality, their true payment is whatever they cut the monthly check for PLUS 1/36th of the chunk of change they put down (assuming a 36 month lease). And in reality it is even worse than that since they lost the opportunity to invest that money and therefore have to forgo any earnings it could have generated or even just the security of having that cash in the bank. And to top it all off, their money is invested in what we all know is a depreciating asset that is constantly at risk as mentioned above.
Based on this, why would anyone put a bunch of their hard-earned money down on a lease? Dealers and finance companies love it since it reduces their risk, but as a consumer it seems like a foolish move.
This transfers risk to you that you may not have thought about. To illustrate, let's say you have a $50,000 cap cost and you put $5,000 down. Now realizing that the car will depreciate 20% when you drive it off the lot, the vehicle is immediately worth only $40,000 the day after you leased it.
So let's say your car is involved in an accident a couple of months later and is totaled. The insurance company will pay off the book value of the car to the leasing company. And gap insurance or a gap waiver (which is actually far more common) will handle the difference between what is owed to the leasing company and the book value of the car. Guess where your $5,000 down payment went? It went poof into the depreciation portion of the car that is now history. So you need another car and your cash is gone.
The same thing would apply if the car is stolen, or burns up in a house fire, or swallowed in a flood, etc...
And it kills me that people talk about their low monthly lease payment when they put down a ton of money. In reality, their true payment is whatever they cut the monthly check for PLUS 1/36th of the chunk of change they put down (assuming a 36 month lease). And in reality it is even worse than that since they lost the opportunity to invest that money and therefore have to forgo any earnings it could have generated or even just the security of having that cash in the bank. And to top it all off, their money is invested in what we all know is a depreciating asset that is constantly at risk as mentioned above.
Based on this, why would anyone put a bunch of their hard-earned money down on a lease? Dealers and finance companies love it since it reduces their risk, but as a consumer it seems like a foolish move.
05-23-2006, 12:20 PM
#2
Sometimes you can buy down the money factor by putting down multiple security deposits.
Sometimes people have a monthly budget they want to stay within (like a budget for work car), and the car they want will cost more, so they put down the extra cash to make up the difference.
Also, tax is usually charged on the monthly payment, but it is not applied to the amount down. So you save a bit on tax every month.
There are a lot of reasons tp put down more money at the start of a lease, but not all of them are good ones;-)
I agree, the idea is to put down the minimum in a lease - usually drive offs - but that doesn't always work for some people.
Also, tax is usually charged on the monthly payment, but it is not applied to the amount down. So you save a bit on tax every month.
There are a lot of reasons tp put down more money at the start of a lease, but not all of them are good ones;-)
I agree, the idea is to put down the minimum in a lease - usually drive offs - but that doesn't always work for some people.
05-23-2006, 12:29 PM
#3
New Member
Thread Starter
Join Date: Jun 2003
Posts: 82
Likes: 0
Received 0 Likes
on
0 Posts
Re: Sometimes you can buy down the money factor by putting down multiple security deposits.
If a person has a monthly car allowance for a business car they would still be better off to not put a bunch of money down and cover the difference themselves on a monthly basis. That way if the car is lost, they don't have to pay the difference on the remaining payments and they didn't lose all that money down or the investment value of it.
And the same thing would apply to the tax. If the car is lost for some reason, you don't have to pay all those little montlhy tax bites you mentioned.
I honestly don't believe there is a good reason to put money down on a lease. The only thing it usually buys is a false sense of "my monthly payment is at a number I like". What is forgotten is how much it cost to get the payment down to that number.
And the same thing would apply to the tax. If the car is lost for some reason, you don't have to pay all those little montlhy tax bites you mentioned.
I honestly don't believe there is a good reason to put money down on a lease. The only thing it usually buys is a false sense of "my monthly payment is at a number I like". What is forgotten is how much it cost to get the payment down to that number.
05-23-2006, 12:51 PM
#5
Sometimes the accounting dept at a company does not allow you to add onto the monthly
or the owner of a business does not want to advertise just how much they are spending on a car.
The monthly tax bite savings situation only works if the car is a write-off. More people finish their lease than lose their car part way through;-) Same goes for buying down the money factor in some cases where allowed. It's acceptable risk in which the numbers favour the user.
The obsession with monthly payment to the exclusion of all other considerations is wrong, however, putting down as close to nothing as possible on a lease is not always the smart way to go either. Every case is different. You must see the whole picture before making your choices.
The monthly tax bite savings situation only works if the car is a write-off. More people finish their lease than lose their car part way through;-) Same goes for buying down the money factor in some cases where allowed. It's acceptable risk in which the numbers favour the user.
The obsession with monthly payment to the exclusion of all other considerations is wrong, however, putting down as close to nothing as possible on a lease is not always the smart way to go either. Every case is different. You must see the whole picture before making your choices.
05-23-2006, 12:59 PM
#6
Re: Putting money down on a lease seems like a bad idea
I agree with you for the most part, in that generally the point of leasing a car is to not OWN it. Thus, you want to put as little of your own money into it as possible. OTOH, I've seen situations where you can actually decrease the overall money put into the lease by putting down some extra money at time of lease. This, to me, may make sense.
Honestly, how common is it to A) get in a car wreck, flood, fire, or godly disaser and B) get the insurance company to TOTAL the brand new car? I think these odds are pretty small. Small enough that worrying about money down at lease wouldn't concern me. I'd still get gap coverage, if reasonable in price, but the odds of the scenario you describe above occurring are slim at best...
Honestly, how common is it to A) get in a car wreck, flood, fire, or godly disaser and B) get the insurance company to TOTAL the brand new car? I think these odds are pretty small. Small enough that worrying about money down at lease wouldn't concern me. I'd still get gap coverage, if reasonable in price, but the odds of the scenario you describe above occurring are slim at best...
05-23-2006, 02:35 PM
#7
New Member
Thread Starter
Join Date: Jun 2003
Posts: 82
Likes: 0
Received 0 Likes
on
0 Posts
More common than you think, and in the end it doesn't really matter
Perhaps the chances are slim; but perhaps not. It may depend on where you live. Ask the people in New Orleans if floods are a slim chance event. Or the folks in California or Arizona about fires, thefts, and traffic accidents.
The point is that even if they are rare events, they can be catostrophic if they do occur and your money is gone. So why take the risk to artifically lower the monthly payment?
And did you take opportunity cost into account in the scenario you described where you could put money down to decrease the overall amount put into the lease? If so, what future value of money figure did you use? Most folks forget to factor this into the equation. Plus the security value of having the money in the bank would be nice if something urgent came up or you happened to lose your job.
Most accountants I have spoken with all pretty much say the same thing. That is "you never want to put money into a depreciating asset if you can avoid it". Another common theme is "never use your money when you can use someone elses cheaply". That logic seems pretty sound to me.
The point is that even if they are rare events, they can be catostrophic if they do occur and your money is gone. So why take the risk to artifically lower the monthly payment?
And did you take opportunity cost into account in the scenario you described where you could put money down to decrease the overall amount put into the lease? If so, what future value of money figure did you use? Most folks forget to factor this into the equation. Plus the security value of having the money in the bank would be nice if something urgent came up or you happened to lose your job.
Most accountants I have spoken with all pretty much say the same thing. That is "you never want to put money into a depreciating asset if you can avoid it". Another common theme is "never use your money when you can use someone elses cheaply". That logic seems pretty sound to me.
Trending Topics
05-23-2006, 02:54 PM
#8
Putting money into a depeciating asset is never wise, but then leasing already reduces
the exposure, since you are (or should be) putting down less than purchasing, and monthly payments are certainly less than if you puchased.
I used to tell people who were on the fence about leasing vs buying, that if they could not afford to buy the car (instead of lease), then they are looking at too expensive a car for thmselves. The idea of leasing is to free up assets for investment.
In the end you put very similar amounts into a lease no matter which way you go, and for some people the chance to save a little more by reducing the money factor or the amount of tax they pay, is worth the risk of perhaps losing that cap reduction if the car becomes a write-off.
I've lived in Cali (and especially SoCal) for over 12 years. Never had to write off a car. And if I did - the difference of putting down $2K vs $5K when leasing a $60K car would be an acceptable risk when overall I could come out ahead by having a lower money factor and paying less tax.
Again, I agree that you should put down minimal out of pocket, but the definition of minimal will change by each person.
I used to tell people who were on the fence about leasing vs buying, that if they could not afford to buy the car (instead of lease), then they are looking at too expensive a car for thmselves. The idea of leasing is to free up assets for investment.
In the end you put very similar amounts into a lease no matter which way you go, and for some people the chance to save a little more by reducing the money factor or the amount of tax they pay, is worth the risk of perhaps losing that cap reduction if the car becomes a write-off.
I've lived in Cali (and especially SoCal) for over 12 years. Never had to write off a car. And if I did - the difference of putting down $2K vs $5K when leasing a $60K car would be an acceptable risk when overall I could come out ahead by having a lower money factor and paying less tax.
Again, I agree that you should put down minimal out of pocket, but the definition of minimal will change by each person.
05-23-2006, 03:03 PM
#9
New Member
Thread Starter
Join Date: Jun 2003
Posts: 82
Likes: 0
Received 0 Likes
on
0 Posts
Sort of missing the point
I guess if someone else is paying for your car, then my assertions may not hold. I should have clarifed that my comments were more targeted to what I would believe is the bulk of the market and people on this board; namely those that are using their own hard-earned money.
Also, I was not referring to increased security deposits to buy down the money factor. In theory, that money is refundable and is not a cap reduction (or the classic "money down") I was referring to in my comments. I was addressing cap reductions only. Though you should remember to factor in opportunity costs when thinking about buying down a rate to avoid saving $25 a month at the expense of tying up a chunk of your money for 3-4 years.
And there may indeed be some combination of circumstances where it makes sense to put down a bunch of money on a lease, but I would have to think that is an even more rare event than the writeoffs you mentioned.
Also, I was not referring to increased security deposits to buy down the money factor. In theory, that money is refundable and is not a cap reduction (or the classic "money down") I was referring to in my comments. I was addressing cap reductions only. Though you should remember to factor in opportunity costs when thinking about buying down a rate to avoid saving $25 a month at the expense of tying up a chunk of your money for 3-4 years.
And there may indeed be some combination of circumstances where it makes sense to put down a bunch of money on a lease, but I would have to think that is an even more rare event than the writeoffs you mentioned.
05-23-2006, 03:53 PM
#10
A lot of people who can afford this kind of car can write off portions of the lease,
and so they deal with circumstances more specialized than we can explore without delving into their personal finances;-) Sometimes they own the company that is "paying" for the lease, and have certain guidelines they must follow. Some people have a windfall that they know they will spend one way or another, and prefer to spend it up front. Every deal is custom made.
There are so many reasons for structuring a lease one way or another, that we can't hope to cover all of them. In writing thousands of leases, some people choose poorly, others wisely, and everyone is trying to make the best of a certain situation;-) All I know is that very few people want to hear about what is good for them financially if it doesn't jive with what they want right now;-)
$25 a month for 36 months is no small chunk of change, and may give a better return than some investments. Take that $25 "savings" and invest it.
IMHO too many people lease just to get more car than they could otherwise afford to drive. They don't use leasing to free up cash to invest, but rather max themselves out. That's the wrong reason to lease IMHO.
I leased my A3 despite less than stellar lease rates, simply because I know I don't want to keep it past 36 months and at the time of leasing, the resale was (and still is) uncertain. The silver lining is that with such a low residual, if the A3 becomes as popular as it appears to be becoming, then I'll be able to sell it for more than the residual and pocket the difference. And yes, I put down just drive-offs, since no bank was offering anything special in the way of reduced money factors for multiple deposits. If I didn't hope that Audi would give us a stickshift V6 A3, or hope that Alfa might be here before too long, then I would have bought it.
There are so many reasons for structuring a lease one way or another, that we can't hope to cover all of them. In writing thousands of leases, some people choose poorly, others wisely, and everyone is trying to make the best of a certain situation;-) All I know is that very few people want to hear about what is good for them financially if it doesn't jive with what they want right now;-)
$25 a month for 36 months is no small chunk of change, and may give a better return than some investments. Take that $25 "savings" and invest it.
IMHO too many people lease just to get more car than they could otherwise afford to drive. They don't use leasing to free up cash to invest, but rather max themselves out. That's the wrong reason to lease IMHO.
I leased my A3 despite less than stellar lease rates, simply because I know I don't want to keep it past 36 months and at the time of leasing, the resale was (and still is) uncertain. The silver lining is that with such a low residual, if the A3 becomes as popular as it appears to be becoming, then I'll be able to sell it for more than the residual and pocket the difference. And yes, I put down just drive-offs, since no bank was offering anything special in the way of reduced money factors for multiple deposits. If I didn't hope that Audi would give us a stickshift V6 A3, or hope that Alfa might be here before too long, then I would have bought it.