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How much is too much money down on a lease?

legend7legend7 Posts: 9
edited June 1 in Jeep

We are trading in our $13k car that we own outright on a new 2014 car, which we will lease (MSRP 38,980, negotiated price 35,900). The dealer has offered to give us $7k cash back so that the cap reduction (down payment) is $6k. I'm hearing different things from different people... some say I am putting down to much on the lease. It amounts to just about a third of the cost of the 39-month lease. My concern is that perhaps there is a risk of losing that $6k if the vehicle is totalled or stolen in the first few months. Would I be out that money or would I get that money back from insurance once the lease company is paid off? Thanks, in advance!

Comments

  • Mr_ShiftrightMr_Shiftright CaliforniaPosts: 44,854

    No you lose all that money especially if the total occurs early in the lease. The insurance company is paying off the car, not the lease. The gap insurance covers the lease. You were supposed to return an actual car, and since you can't, the leasing company wants the value of it back.

    You also lose the USE of that money, and the resulting interest gains, if you conservatively invested it somewhere. So that's another $900 or so lost at 5% over approx 3 years. You should also have gap insurance in place of course.

    Sometimes people confuse the idea of a down payment when purchasing a car vs. a down payment when leasing one. The two are different, and require a different strategy.

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  • legend7legend7 Posts: 9

    @Mr_Shiftright said: No you lose all that money especially if the total occurs early in the lease. The insurance company is paying off the car, not the lease. The gap insurance covers the lease. You were supposed to return an actual car, and since you can't, the leasing company wants the value of it back.

    You also lose the USE of that money, and the resulting interest gains, if you conservatively invested it somewhere. So that's another $900 or so lost at 5% over approx 3 years. You should also have gap insurance in place of course.

    Sometimes people confuse the idea of a down payment when purchasing a car vs. a down payment when leasing one. The two are different, and require a different strategy.

    Thanks so much for your response. You say the insurance company is "paying off the car, not the lease." Yes, but they are paying for replacement cost of the car, aren't they? Won't they first determine the value of the car just prior to it being wrecked and pay that? Whether it is financed via purchase or lease or whether the driver owns it outright the value paid by the insurance will be the same, right?

    So next week if the car is totaled and the insurance company pays $35k, they will pay it to the lien holder which for me will be the lease company. My $6k will also be at the lease company so now the lease company has $41k for a car that was purchased for $36k. I don't see how they could keep the excess and how I wouldn't be entitled to that. I'd take a loss, but I just don't see how I'd lose the whole $6k. What am I missing?

    Thanks, John

  • kyfdxkyfdx Posts: 28,644

    You buy (or lease) a new car for $40K. Once it is titled, it is a used car.. Even a 1 month old used car with 1000 miles is worth thousands less than new.

    So.. .you might not lose the whole $6000, but you might lose $3000-$4000 of it..

    Why risk it? How much do you save by putting down $6000 on a lease? Especially on a Jeep, where the money factors are very, very low (the equivalent of 1/10 of 1% APR).

    The only good excuse I've heard for a big CAP cost reduction? "My wife says I can only have a payment of $300/mo., so I need to put $10K to get there." ;)

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  • legend7legend7 Posts: 9

    Thanks so much. We have decided to buy (48-month loan, around 2.6% APR) rather than lease. Since our lease term was on the long side (39 months) and our down payment was large, we think it makes more sense just to buy. We'd rather keep it for around 4 years anyhow vs. 3 years. We'll put down the whole $13k (trade).

    One question for you though. If buying it and we revisit the scenario where the vehicle is totalled in the first months of ownership, don't I face the exact same insurance issue as you've outlined above in the lease scenario? Buy vs. lease doesn't really matter... if it is totaled my insurance will write a check to the bank where our loan is, and we'll get the excess, but we'd still be a couple thousand short either way right?

  • kyfdxkyfdx Posts: 28,644

    Yes... you are very perceptive. Most people miss that part of it. You have the same risk with a purchase.

    The only reason it's different with a lease? The bank is providing included GAP insurance, and you can have that risk covered at no extra cost. (most banks, anyway).

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  • Mr_ShiftrightMr_Shiftright CaliforniaPosts: 44,854

    Also by the time you factor in price negotiations on a purchase, the interest rates, and how you've avoided the tricky obfuscations often used in car leasing (leases are very profitable for the dealer), you come out ahead in the long run on a purchase.

    Also if you damage a lease car, the lease company jumps in on the process, complicating the repair and invoking further obligations written into your lease. Everyone should read their lease agreements VERY carefully--they are full of surprises. And don't put it past some (not all) dealers to change the cap cost and interest rates after you've negotiated them.

    Even the "buy out" option on a lease can be disadvantageous to you, since a pumped-up residual leaves you with a very expensive used car to buy at the end of the lease.

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  • legend7legend7 Posts: 9
    edited June 2

    Thanks for all the help, guys, I really appreciate it. I applied for a loan through LightStream (which I had never heard of) and was approved for a personal unsecured loan. Pretty cool that it allows me, even after approved, to change the terms (dollar amount and months). I settled in on an even $20k loan at 2.19% over 42 months for a payment of $495. No prepayment penalty. No loan fees. My trade and maybe a few hundred dollars will cover the rest of the purchase. One less thing to negotiate with the dealer. ;)

  • steverstever Ex Yooper, just arrived in New MexicoPosts: 40,540
    edited June 2

    It doesn't hurt to let the dealer try to meet or beat your loan terms. Dealers make money packaging loans and they'll try to get your business if they can.

    2.19% is pretty cheap though, and there's no lien put on the car.

    "LightStream, the online lending division of SunTrust Banks Inc., is taking aim at a niche space: Low interest unsecured loans for highly qualified customers. It's all part of a broader bank industry plan to woo and keep so-called mass affluent customers, and to avoid losing marketshare to new peer-to-peer lending sites that cut out banks altogether, says Greg McBride, senior financial analyst for Bankrate.com."

    New unsecured loans beckon, but should you bite? (Reuters)

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  • kyfdxkyfdx Posts: 28,644

    @Mr_Shiftright said:

    Also if you damage a lease car, the lease company jumps in on the process, complicating the repair and invoking further obligations written into your lease.

    I've never had the bank involved in a repair on a leased vehicle.. Or, ever had an issue with a collision repair on lease turn-in.

    Leases aren't that complicated.. If you are financially unsophisticated, you can be taken advantage of, but not that much differently from a financed vehicle.

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  • legend7legend7 Posts: 9

    Bahhhhh.... well that didn't work out as planned.

    The dealer was unable to substantially negotiate the MSRP on a purchase deal. In fact, hardly at all. With the lease deal, we were able to get $2800 off the MSRP due to mfgr lease incentives. I ended up leasing, getting $1500 more for my trade than initially offered, and "only" put down $4k. So, I'll get a check for $10k when I go to pick up the vehicle when it arrives at the dealer later this week.

    So now I've got $20k (at 2.19%) coming from this personal loan and $10k coming back from my trade... $30k in cash, with payments totalling $950/month.

    Once my account is set up with the lease company, I'll be curious to see what the buyout is... I wonder if it would make any sense to buy the vehicle next month from the lease company. Sure I will have paid up front lease fees, but saved $2800 on the MSRP. Interesting angle. I doubt it will work though.

    Guess I better invest this $30k wisely and make more than 2.19% on it!

  • steverstever Ex Yooper, just arrived in New MexicoPosts: 40,540
    edited June 3

    Why not just decline to take the $20k loan? That's a guaranteed rate of 2.19% right there.

    (btw, are you getting a Grand Cherokee? The numbers seem high for a Cherokee, which is how we have this discussion categorized)

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  • legend7legend7 Posts: 9

    Cherokee, not Grand Cherokee. MSRP $39.5k, that's why numbers look high. I'm investing that $20k loan. Pretty sure I can easily beat 2.19%, unless the market goes south fast.

  • steverstever Ex Yooper, just arrived in New MexicoPosts: 40,540
    edited June 3

    Wow, you must be getting a Limited with everything. And I mean everything. :)

    Please post some pics soon!

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  • legend7legend7 Posts: 9

    EVERYTHING except for the Activedrive II, wireless charging pad, and CD player. We are leaving an Inifiniti SUV as the trade, so had to load up this Cherokee to make it better than the Infiniti it is replacing.

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