|Quote, originally posted by SN2BDNGRZB55 »|
That statement is speculative and not completely true. You MAY come out ahead if you put more money down, as far as investing-wise. However, his point that your car would be paid off and you would be out that money if it were ever stolen is not satisfied by your statement. If you put more money down, and invested the difference from the lower payment, do you really think you would earn enough interest on that monthly difference in four years to replace the original cap cost reduction you put down when you leased the car, if the car were stolen or totalled? Not quite...
Then there is the question of what is the cost of the lease vs. the ROR on your investment? If your money factor is REALLY low, then it wouldn't make sense at ALL to put extra money on your lease. That would be just throwing away compound interest that you would have had, had you left that money in your investment vehicle.
If your Lease Money Factor is HIGH, then you may consider paying down cap cost so that you are paying less finance charges, but only if your investment vehicle isn't also giving you a hgh ROR. However, that still doesn't preclude the risk of losing all of that if the vehicle is totalled or stolen - your orignal cap investment would be lost when the gap insurance took over (built in to a lot of leases).
Besides, if your intention was to buy in the first place, you most likely wouldn't consider a lease. If you are going to get a lease with a low money factor, then you just as well could probably get a loan with a very low interest rate. Then, you are actually putting your down payment towards something (ownership), and you are saving interest. However, that still doesn't mean having a large down is better, especially with a very low interest rate (like some of the advertised 0% to 3.9% dealer incentive loans). If you have a good investment vehicle, somewhere in the 10%-12% range conservatively, then your interest would compound MUCH faster putting your money in the investment than saving the interest off of such a low interest rate loan... you just have to do the math (or have someone do it for you) before you decide to purchase/lease a vehicle to see what makes the most sense financially, and what your ultimate intentions with the vehicle will be. Hope that helps
Modified by SN2BDNGRZB55 at 10:10 PM 6-5-2004
Ok, here is some math to prove the point.
- Live in Canada (hence 7% GST)
- Car cost - $55,000
- Down payment to lease or purchase - $12,500
- Using current VW promo rates in Canada (purchase = 3.9%, lease = 2.4)
- Since the aim = keep costs low, go for 60 month purchase and 48 month lease + buyout
- Residual value of car after 48 months = 0.37 (which is not far off the rates VW finance uses on a new passat wagon - low, I know...but it is what they use), or ~ $20,350
Option 1 Purchase:
- you pay $55,000 + sales tax = $58,850
- put down $12,500 you are financing $46,350
- at 3.9% for 60 months, monthly payments = $851.52
- total dollars out of your jeans to buy this car: $63,590 (payments on finance + down)
Option 2 Lease
- $55,000 cost less $12,500 down less residual value of $20,350 = $22,150 to cover in lease payments
- at 2.4, monthly payments (pre-tax) = $524.31
- you pay sales tax on down (= $875) plus on montly payments
- so total monthly payments = $561.01
- total cost of lease to you = $40,303.48
Now you have to buy out on the residual of $20,350
- note VW will charge a $500 purchase fee, so really it is $20,850
Now, if you recall my earlier post, one of the keys for this = idea that your income would increase in the next few years and you could actually save some down payment over the 4 years of your lease (income could also increase from, saying, paying off student loans and being able to hold the savings, etc).
- if your income remains the same, obviously this does not work -
Say you save up another $10,000 over 4 years.
- You have to pay $20,350 + sales tax + $500 fee = $21,774.50
- after $10,000 down, you have $11,774.50 to finance
- to be fair, we assume that you do not get a great rate on the refinanicng and end up paying a whopping 8% (if you get a better rate, this plan works even better)
- now, if you want to keep the "car payment" side of your life about the same, you can finance that over 24 months for monthly payments of $532.53
- Total cost of buyout = $22,780.69
Add that to lease and you get $63,804.17
That is actually $506.78 LESS than purchasing.
Plus, with the ~$190/month lower payments on the lease over the purchase, you could invest it and earn a bit of interest.
If you get "aggressive" on the buyout and finance over 1 year, your monthly payments increase to $1,024.25 for the year, but your cost of buyout drops to $22,209.94
Means your lease+buyout is now $996.52 less than purchasing PLUS, again, the time-value of the money you saved on monthly interest payments.
PLUS on either example, you have actually paid less interest to the bank on lease+buyout.
As I say, in the right circumstances it works.
(lastly, before you object, if you only save another $5,000 to put down over the lease (which is less than $190 per month you save in leasing) and still buyout over 2 years, you still save about $79 PLUS what you have earned on the $5,000 over the 4 years)
Modified by backpacker at 4:22 PM 6-6-2004
Modified by backpacker at 4:25 PM 6-6-2004