Disclaimer: This post and the numbers are my opinion only and should nt be taken as legal advice as everyone's situation is different and requires their own unique calcualtion. Also just to get the terminology right: Premiere Purchase = Balloon Loan = Buyer's Option, which is very similar to lease in terms of payment amount per month for a vehicle for a specific term.
I was asked by an AudiWorld member if premiere purchase makes any sense now that the interest rates are so low on the conventional auto lonas, namely 1.9%. So for an example I have put together a fictional cash-flow estimation just so people will see how good Premiere Purchase can be. If you're doing a conventional loan you might be kicking yourself in the head after reading this......
For people who carry a fair amount of debt, it's better to keep their cash flow higher by using premiere purchase and use the extra cash to pay off higher interest credit cards or such.
For an example (these are fictional numbers just to demonstrate the idea)
Let's say you're buying a car that costs $30K out the door and has an MSRP of $31K. It also has a residual value of 48% after 48 months. We assume 1.9% interest on the conventional financing and 2.25% on the premiere purchase. We also assume that you owe $20K in credit card debt that carries a 15% interest.
Your total monthly budget is $1000 for the car payment and the credit card.
Scenario #1, conventional loan:
You take the conventional loan for 48 months.
With the conventional loan for 48 months on $30K with 1.9% interest, your monthly payment is going to be $650.
So from your $1000 budget you can spend $350 a month on the credit cards while $650 goes to car payments.
After 48 months you will have a car fully paid that will worth about 48% of it's orignal cost (that is the residual value), that means you will have a car that is worth $14,880.
During the 48 months you'll be making $350 a month payments toward your credit card debt that carries a 15% interest rate. After 48 months you will still carry a total credit card balance of $13,500. So your net worth will be the $1380 ($14,880-$13,500).
Note that the above assumes that the car would actually worth that much (it probably wouldn't) and the interest on the credit card is compounded monthly (it is actually compounded daily) so the actual figures would be even worse.
You take the conventional loan for 60 months at 1.9% and we'll see what you're doing after 48 months.
With 1.9% for 60 months on $30K, your monthly payments on the car would be $525. That would leave you with $475 for your credit card payments. Let's see how you'd be doing after 48 months.
You'd owe $6,200 on your car after 48 months, and it would worth $14,880, making it a net value of $8,680 ($14,880-$6,200) to you.
On your credit card, after making 48 consecutive payments of $475, you would still owe $5,300. So you would have a total net worth of $3,380 ($8,680-$5,300)
You do a premiere purchase with 2.25% on the $30K car for 48 months. With the 48% residual value your monthly payment on the car is going to be $360. That means that you can pay $640 towards credit card debt every month.
Making $640 a month payments on the credit car will actually pay off your $20K balance in 40 months. So for the last 8 months, you could be saving that $640 in a savings account. After 48 months your car will have no value to you as it will worth exatly as much as you owe on it, that is what premiere purchase is all about. However you will have 8 months of $640 saving saved up. So your net worth will be $5,120.
So looking at the above 3 scenarios which would you rather have?
1) $13,500 in debt on a credit card with a car that is fully paid for and chances are it is not worth as much as you thought it would?
2) $5,300 in debt on a credit card with a car that has $8000 equity in it that if you would decide to trade in you could probably get $6K out of it.
3) Absolutely no credit card debt, over $5,000 in the bank ready for a nice little down payment on a new car or a house and you are ready to take out a new loan for a new car since your 4 year old vehicle that just lost all its warranty is no longer worthwhile to keep.
I can assure you that the above numbers add up jut perfect, there is no magic involved. Also, the equations work with different interest rates and residuals just as well, and instead of credit card debt you can do a high yield investment on your extra money (if you're one of the lucky ones with no credit card debt).
The breakeven point depents on the interest rates offered on your investment/credit card and the difference between the conventional loan interest and the premiere purchase interest rate. With the current interest rates you would be crazy to tie up your money in a car doing a conventional loan. As the old saying goes:"Buy what appreciates, rent what depreciates".
Also I must add that with the premiere purchase you can still refinance your vehicle after the 48 months if you decide to keep it, you can sell it for a profit if the residual value (payoff balance) is lower than the market value, or you can just turn it back in if the market value is less than what you owe on it (most likely scenario, the used car market sucks at the moment, I doubt that it will get better within the next 4 years)
I hope this was an informative post and you can make a better educated decision regarding your finances. For me, getting premiere purchase is a no-brainer, would not consider any other option.