MSD Primer
I. History: back in the last century, before leasing became the most popular way to "get" a new BMW, corporate execs and dealers alike marveled at just how many buyers simply walked in and stroked a check for their new cars. Realizing that cash buyers meant no back-end profit (called "Finance Reserve") or essentially lost profit opportunity, captive lenders like BMW Financial Servces and Mercedes-Benz Credit Corp pioneered a new way to get buyers into cars. In the 1970's and early 1980's we had "open-ended leasing" which had turned many prospects off to the concept of leasing altogether. A newer type of leasing, closed-ended (fixed residual, with guaranteed future value) began to gain in popularity, but still, too many high-end buyers were paying cash for their luxury cars. This meant longer buying cycles, as well as lost profit opportunities (no reserve/interest). It was then that the Brain Trust in NJ thought up what came to be known as the Multiple Security Deposit Program - a tool designed to convert traditional cash buyers into lessees. This would have the ultimate effect of shortening the buying cycle to 3 years, and afford both the lender and dealers to earn additional profit.
II. Why are MSDs so popular here on Bimmerfest (while the average salesperson has never heard of them, let alone knows how they are calculated or why anyone would want to use them)? Back when I started this forum I was a big fan of MSDs - stemming from my years in Finance and General Sales Manager I considered it my duty to share with our members the "Smart Money" way to get a car. Needless to say, our members quickly saw the light, and soon the MSD program became a part of the culture and forum folklore of our membership body. A whole legion of "MSD Warriors" was born. And they, in turn, posted about it, and before long, everyone was hooked (and rightfully so).
III. How do they work? Participating BMW retailers are allowed to reduce the customer lease rate (a.k.a. "Money Factor") under the BMWFS Multiple Security Deposit ("MSD") Program. The MSD program offers the unique advantage of "refundable security deposits" being used to lower a monthly payment quit effectively. A lease rate factor reduction of .00007 is applicable for up to seven security deposits beyond the conventional requirement. Currently security deposits are no longer a required lease element, but that could change again. Seven deposits would make .00049 the maximum rate reduction. For example, let's say that the confidential dealer buy rate is a lease money factor of .00130. If a lessee were to do the full seven MSDs, that would reduce the rate to .00081 (a reduction of .00049, or 00007 x 7. In my opinion, the MSD Program really only makes sense if (a) the lessee is sitting on sufficient liquid assets, and (b) if the lessee goes all the way doing all seven MSDs. To do just one or two, it probably isn't worth it. Your extra cash would be better served applied as capitalized cost reduction ("down payment" in the vernacular of leasing).
IV. And just how does this really benefit the buyer? Why would a person who could or would otherwise pay cash for a car (or a "conventional" lessee) want to do a MSD lease? Well, if you were to compare the savings of the MSD lease with a conventional lease, and then factor in the fact that the lessee gets their security deposit back, the MSD lease could actually be construed as an "investment vehicle". Seriously. Try it yourself. With a MSD "investment", the ROI is often 10% or greater, at a time when traditional bank yields are about half of that. Back when the MSD program was first conceived, the rate factor reduction was a full .0001 for each deposit, and lessees could do, get this, a maximum of 10 SDs! In the early 2000's the program got so popular that BMW cut the rate factor reduction back in half to .00005 and at the same time, limiting the maximum number of deposits to five. Needless to say, the MSD Program's penetration dropped off the chart. It just wasn't attractive any more. A couple of years later, BMWFS effectively revived interest, "enhancing" the program. They inflated the rate factor reduction to .00007 and allowed a maximum of seven deposits. A far cry from the original conception, but still a valuable tool for customers and dealers alike.
DECEMBER 2019 UPDATE: the current MSD Program allows for a rate factor reduction of .00005 and still a total of seven security deposits (for a mex reduction of .00035 of the lease money factor).
Click here for the 12/2019 Full Update: https://www.bimmerfest.com/forums/showpost.php?p=13195487&postcount=182
.
I. History: back in the last century, before leasing became the most popular way to "get" a new BMW, corporate execs and dealers alike marveled at just how many buyers simply walked in and stroked a check for their new cars. Realizing that cash buyers meant no back-end profit (called "Finance Reserve") or essentially lost profit opportunity, captive lenders like BMW Financial Servces and Mercedes-Benz Credit Corp pioneered a new way to get buyers into cars. In the 1970's and early 1980's we had "open-ended leasing" which had turned many prospects off to the concept of leasing altogether. A newer type of leasing, closed-ended (fixed residual, with guaranteed future value) began to gain in popularity, but still, too many high-end buyers were paying cash for their luxury cars. This meant longer buying cycles, as well as lost profit opportunities (no reserve/interest). It was then that the Brain Trust in NJ thought up what came to be known as the Multiple Security Deposit Program - a tool designed to convert traditional cash buyers into lessees. This would have the ultimate effect of shortening the buying cycle to 3 years, and afford both the lender and dealers to earn additional profit.
II. Why are MSDs so popular here on Bimmerfest (while the average salesperson has never heard of them, let alone knows how they are calculated or why anyone would want to use them)? Back when I started this forum I was a big fan of MSDs - stemming from my years in Finance and General Sales Manager I considered it my duty to share with our members the "Smart Money" way to get a car. Needless to say, our members quickly saw the light, and soon the MSD program became a part of the culture and forum folklore of our membership body. A whole legion of "MSD Warriors" was born. And they, in turn, posted about it, and before long, everyone was hooked (and rightfully so).
III. How do they work? Participating BMW retailers are allowed to reduce the customer lease rate (a.k.a. "Money Factor") under the BMWFS Multiple Security Deposit ("MSD") Program. The MSD program offers the unique advantage of "refundable security deposits" being used to lower a monthly payment quit effectively. A lease rate factor reduction of .00007 is applicable for up to seven security deposits beyond the conventional requirement. Currently security deposits are no longer a required lease element, but that could change again. Seven deposits would make .00049 the maximum rate reduction. For example, let's say that the confidential dealer buy rate is a lease money factor of .00130. If a lessee were to do the full seven MSDs, that would reduce the rate to .00081 (a reduction of .00049, or 00007 x 7. In my opinion, the MSD Program really only makes sense if (a) the lessee is sitting on sufficient liquid assets, and (b) if the lessee goes all the way doing all seven MSDs. To do just one or two, it probably isn't worth it. Your extra cash would be better served applied as capitalized cost reduction ("down payment" in the vernacular of leasing).
IV. And just how does this really benefit the buyer? Why would a person who could or would otherwise pay cash for a car (or a "conventional" lessee) want to do a MSD lease? Well, if you were to compare the savings of the MSD lease with a conventional lease, and then factor in the fact that the lessee gets their security deposit back, the MSD lease could actually be construed as an "investment vehicle". Seriously. Try it yourself. With a MSD "investment", the ROI is often 10% or greater, at a time when traditional bank yields are about half of that. Back when the MSD program was first conceived, the rate factor reduction was a full .0001 for each deposit, and lessees could do, get this, a maximum of 10 SDs! In the early 2000's the program got so popular that BMW cut the rate factor reduction back in half to .00005 and at the same time, limiting the maximum number of deposits to five. Needless to say, the MSD Program's penetration dropped off the chart. It just wasn't attractive any more. A couple of years later, BMWFS effectively revived interest, "enhancing" the program. They inflated the rate factor reduction to .00007 and allowed a maximum of seven deposits. A far cry from the original conception, but still a valuable tool for customers and dealers alike.
DECEMBER 2019 UPDATE: the current MSD Program allows for a rate factor reduction of .00005 and still a total of seven security deposits (for a mex reduction of .00035 of the lease money factor).
Click here for the 12/2019 Full Update: https://www.bimmerfest.com/forums/showpost.php?p=13195487&postcount=182
.
