[thelookingglass]

Hi all,

Two quick questions about down payments:

1) Why is it conventional wisdom to put down as little as possible on a lease?
2) Do down payments include the first month payment? The dealer I'm working with is asking for down payment and first month's payment. Is that redundant?

 

['Cane]

1) Why is it conventional wisdom to put down as little as possible on a lease?

Because DP only lowers your payment, it does not affect your residual value. So, would you rather have 3000 in the bank, or a payment lowered around $90?

2) Do down payments include the first month payment? The dealer I'm working with is asking for down payment and first month's payment. Is that redundant?

No, DP is seperate from the inception fees (1st payment, Tax, etc).

 

[thelookingglass]

Because DP only lowers your payment, it does not affect your residual value. So, would you rather have 3000 in the bank, or a payment lowered around $90?

No, DP is seperate from the inception fees (1st payment, Tax, etc).

But you'll pay the same amount in sum whether or not you choose to put anything down, correct?

 

[SONET]

But you'll pay the same amount in sum whether or not you choose to put anything down, correct?

No.

But it's generally wiser to invest your money elsewhere. This is the best argument for leasing in the first place.

--SONET

 

[Wallenrod]

No, you are investing in someone elses property by putting money down to reduce cap cost on a lease. You have no equity in the car - that is the point of leasing. If you do put money down, you create a false equity in a car, such that you will never get back. You should be only paying for depreciation, interest charge and tax on a monthly basis.
Think of leasing as renting - would you give Avis couple thousand bucks just so that they charge you less each time you rent a car? You can also look at this problem from PVM as well.
Another point is that if your car is ever stolen or totalled - it's your leasing company that gets its value back not you. So if you put 5K down, you will never see this money again.

 

[thelookingglass]

No, you are investing in someone elses property by putting money down to reduce cap cost on a lease. You have no equity in the car - that is the point of leasing. If you do put money down, you create a false equity in a car, such that you will never get back. You should be only paying for depreciation, interest charge and tax on a monthly basis.
Think of leasing as renting - would you give Avis couple thousand bucks just so that they charge you less each time you rent a car? You can also look at this problem from PVM as well.
Another point is that if your car is ever stolen or totalled - it's your leasing company that gets its value back not you. So if you put 5K down, you will never see this money again.

Great points. Although I'm not sure I see the value in "equity" as it relates to cars. Why does it matter if the darn thing depreciates the minute you drive it off the lot?

By putting money down, you can, however, save a few hundred on taxes ... at least in those states where tax is added to the monthly payment.

 

[ger3sf]

By putting money down, you can, however, save a few hundred on taxes ... at least in those states where tax is added to the monthly payment.

In CA, sales tax is assessed on the cap reduction. I'd rather deposit the cap reduction amount in my bank acct, then draw on it to help with the monthly lease payments.

 

[thelookingglass]

In CA, sales tax is assessed on the cap reduction. I'd rather deposit the cap reduction amount in my bank acct, then draw on it to help with the monthly lease payments.

By cap reduction, you are referring to the MSRP - agreed to selling price? Or, are you talking about the adjusted cap cost?

A dealer in CA told me that tax was added to each monthly payment

 

[Wallenrod]

By cap reduction, you are referring to the MSRP - agreed to selling price? Or, are you talking about the adjusted cap cost?

A dealer in CA told me that tax was added to each monthly payment

I believe they take the MSRP and assess tax then devide it into monthly payments - effectively taxing whatever cap cost reduction you might have made. I am not 100% sure of it though.

 

[Wallenrod]

Great points. Although I'm not sure I see the value in "equity" as it relates to cars. Why does it matter if the darn thing depreciates the minute you drive it off the lot?

By putting money down, you can, however, save a few hundred on taxes ... at least in those states where tax is added to the monthly payment.

It would be a dminishing equity - sort like the opposite of real estate equity in CA

 

[ger3sf]

By cap reduction, you are referring to the MSRP - agreed to selling price? Or, are you talking about the adjusted cap cost?

A dealer in CA told me that tax was added to each monthly payment

Sorry, I meant the down pmt...for example:

MSRP = $40K
Agreed selling price = $38K
Less your down pmt (cap reduction) = $5K
Adj cap cost = $33K

The state (CA) will collect sales tax on the $5K down payment (8.5% of $5K = $425), as well as sales tax on each monthly payment.

 

[SONET]

In CA, sales tax is assessed on the cap reduction. I'd rather deposit the cap reduction amount in my bank acct, then draw on it to help with the monthly lease payments.

I think you mean cap cost.

--SONET

 

['Cane]

I think you mean cap cost.

--SONET

No, he's right. It's the same here in FL... tax is assessed on the cap reduction.

 

[James]

Because DP only lowers your payment, it does not affect your residual value. So, would you rather have 3000 in the bank, or a payment lowered around $90?

It's also a question of liquidity and ROI. If the $3000 is in an account making less then the lease rate then in the end you come out behind. However, it might be worth the marginal loss to retain $3000 in liquidity.

I don't buy the arguement that you are creating "false equity". You are simply pre-paying what you are going to end up paying anyway (assuming you don't trash the car).

That said, I have to agree with 330Cane that I'd rather have the $3000 in the bank since lease rates are typically pretty low. The hard truth is that if you need a large down payment on a lease to bring the payments down to something you can afford you probably can't afford the car.

My $0.02 that no one asked for .

James.

 

[LeaseCompare]

In CA tax is based on the monthly payment after the calculation.

As was mentioned before in regards to the down payment. We had a customer put $3K down as cap reduction. Three months later the vehicle was totaled and insurance paid off the lease. He did not however get his cap reduction back, in addition he paid tax on the cap cost resuction as you will too.

 

[SARAFIL]

Around here, you pay tax on your monthly payment AND tax on the down payment. So, there is no benefit to a down payment in terms of tax savings.

 

[James]

Three months later the vehicle was totaled and insurance paid off the lease. He did not however get his cap reduction back, in addition he paid tax on the cap cost resuction as you will too.

Given how cheap lease rates are I think that is sufficient to scare me away from putting a down payment on a lease .

James.

 

[MG67]

I paid a dp only because I'm from the Netherlands and leased my first car through BMW FS. I put $3,500 down to get the payments to were I wanted them to be. (because of my new comer credit... )
At the end of this year I will trade my car for a new and only pay for the drive off...:thumbup:

 

[Lori]

One reason to reduce monthly payments by putting down money on a lease would be a rotten little figure called debt to income ratio. :banghead:

 

[arnolds]

One reason to reduce monthly payments by putting down money on a lease would be a rotten little figure called debt to income ratio. :banghead:

If you are worried about Debt to Income ratio w/c is usually used for purchasing a house, hold off in getting the car and get the house first.