Is it better to minimize or maximize downpayments on a lease?

Lets assume the MSRP of a 2007 G35X with nav/prem/tech is about $52000CDN. With a say 2% discount, the selling price is $50,960. Assume the interest rate is 5.9%. Ignore freght/pdi etc for the moment.

Now compare different down payments with the monthly payments:

Option (a) - $1,000 down toward car, 36 pmts of $910.60 : Tot =$33,921.60
Option (b) - $15,000 down toward car, 36 pmts of $428.16 : Tot = $32,513.76

On the surface, optiion (b) with the higher downpayment saves $1407.84 in real after tax money over three years. Makes sense as a smaller amount is being amortized. But this does not account for lost opportunity on the $14000 difference.

So let says one puts $1000 down, and put $14000K in an ING 3% savings account, and draws that account down to make up the difference in monthly payments, ie withdraw $482.44 a month, so that the withdrawal, plus $428.16out of pocket will make up the $910.60 payment.

Even if the savings account were tax free, that account would be depleted after 30 months, so again option (b) is better.

Am I missing something?

I think the only risk in (b) is if one wants to get out of the lease early.

Comments?

G35-2-B
Toronto, Ontario

 

i would say minimize the down payment.
dealers make the most the most off of the down payments.
why put soo much down on something you are going to return later?

 

Couple of points

1) Regardless of returning it later, you are still paying them one way or another for the duration of the lease.... you can pay more down and less per month or less down and more per month...but you still pay...even if you retrun the car.

2) Regardless of whether or not the dealers profit from the large down payment, why would I go with an option that will cost me $1407.84 more?

 

Pretty simple. Plop down $15K up front, drive off the lot, total the car. Now what. You could have just ate $15K...ALWAYS put as little down as possinle on a lease!

 

Well, first of all, ING is now 4.4%. There are higher options, too, like HSBC's 5.05%, and EmigrantDirect's 5.15%. Let's not forget other ways to invest your $14,000, such as stocks, where you might get a higher (or lower) return.

Plus, having the $14,000 cash available to you can be a lifesaver. You'll never know if suddenly you need the money for something. Yes, the monthly payments will be higher with a $1k down payment, but like you said, you can use that $14,000 to help pay the down payment.

Also, money depreciates over time, and 3 years is a long time. You also might get raises, bonuses, sell some stuff, invest in things, etc. So during that 36-month stint, a lot can alter your net worth. Am I making sense here? I know I'm not using exact math, but unless you're owning your car, putting a large down payment may not be advantageous. It just sounds nice on paper to see a much smaller monthly payment.

 

OK I'll bite , Not following. Isn't that what insurance is for? I thought they only care about MSRP and residual values. Why do they care waht your down payment on the lease was or what your monthly payments are???

 

Yes, there are higher guranteed rates than my 3% example, but dont forget I was assuming no tax...ie its closer to a 6% return..and it still didnt pay.

If net worth changes for the better ( ie raises, bonuses etc ) that for sure the higher down payment makes sense.

If net worth goes the other way, or some emergency comes up, that's what lines of credit (or other liquid assets) are if needed or some unforseen emergency.

So, assuming the post about insurance is clarifed, the lower down payments mean a certain out of pocket cost of $1400, for which I would need to earn $2800 to cover. This seems to be high enough to warrant the higher down payment being the more attractive option.

Yet another route is to consider the multiple security deposits option...but I have not researched that one yet.

 

You don't own the car, the leasing company does. You are just renting it. If you total the car, your insurance company pays its portion of the lease payoff, and gap insurance will cover any difference. You don't get anything back that you may have paid upfront. This is why most resources suggest making little to no downpayment on a lease.

Of course, things may be different in Canada, eh.

 

Undertsood, but what happens after the insurance comapny replaces the car? Say you were 6 months in. Do you get a replacement car and continue with your lease payments (as if there were no accident) ...or is the lease terminated?

 

Canada is the same.

 

My personal opinion is to never, ever lease. To me, the whole purpose of leasing is to minimize cash flow needed for the vehicle. But in everyday terms that tends to get us to make a decision different than if we were to finance or pay cash. In plain English, overspend.

Why lease a Japanese car? It's nearly 100% reliable, but has a lesser resale than a German car. The German car is less reliable, yet has a bullet-proof resale. So if one were to lease, why not lease a German car? The high residual value is going to have an effect on the monthly payment. Plus leasing implies changing a car every 3 years. Why do that on a Japanese which should go quite a long time without incident? Whereas the German car comes off free maintenance and will have expensive service if needed after the initial period.

Opportunity cost does not apply here. If one wants to play that game, then it's pretty smart to say a Honda Accord, which is a very reliable car, is cheaper than a G35 by roughly 18k. That 18k is greater than the marginal benefit provided by the G35, so the G35 is out of the picture if using economics. The G35 is pure luxury, as is a 335, 550, 760, S55 AMG, and so forth. My .02.

 

I think it is basically treated like an early lease termination. The lease is bought out with the insurance payoff, and you are done. No replacement car.

 

Yes, I think that's right, but you need to check the small print side of the lease form to be sure.

Also, say you paid this $14k up front;
It gets totalled & the leasor gets paid out.
IF there is still + equity, you would be entitled to claw back.
But you can be certain, the leasor will find a way to eat up any positive equity....
dispersion fees, profit entitlement etc, etc.