Demystifying the Marketing Ad

Many of you have probably seen TV/Internet advertisements promoting “incredibly cheap” lease payments on premium vehicles such as BMW, Mercedes, Audi and Infiniti (to name a few). I am also willing to bet that many of you – who otherwise wouldn’t be in the market for a new car – were probably enticed by those ads as well. If those low payments have peaked your interest then some marketing guru just earned their paycheck.

These ads have one simple goal – to get you interested. Does it mean it’s that cheap? In most cases, it’s not. In the world of auto leasing, potential lessee must understand two things… 1) The less you put down, the better. After all, you have to return your car at lease end, so why give away so much of your hard-earned money? 2) Options, fees and individual tax situations can change the deal from a seemingly “good deal” to a “bad”one.

Lets examine Mercedes Benz’s “Special Lease” offer on the C300 Sport…

The ad states a $349/mo lease payment, exclusive of sales tax. In Los Angeles county, we pay around 10% tax. So that $349/mo payment, its more like $390/mo. Next, we have the obligatory “first month” payment, which is due at signing. Then, the deal requires that you “contribute” roughly $3000, to bring down the payments to that “$349/mo” range. Now lets talk fees. More often than not, the bank will charge you an acquisition fee, in this case, it is $795. This fee covers the processing fee of applying for a lease loan and it typically covers the GAP insurance as well. I say typically because not all banks offer that (i.e. Toyota require that you pay extra). At most MBZ dealerships, the bank fee is usually bumped to $1095 (a $300 mark-up) for the bank acquisition. Is that legal? Yup, it sure is. Dealers are allowed to impose any fees they want and they can also mark up the money factor, therefore, it is your job to filter out the phony ones from the legitimate ones.

In the end, your out-of-pocket will end up being roughly $4200 due at signing. Also keep in mind that ad doesn’t include sales tax on the fees you are paying, DMV registration, county and state fees. In the end, you would be looking at $5000 out of pocket, $349/mo + tax. Not as good as it used to sound, does it?

The Right Way to Lease

The proper way to lease a vehicle is not too different from buying a car. You have to negotiate a sale price. Do not negotiate payments unless you know what how much you SHOULD be paying. Payment negotiation should be left to those who have pre-calculated their payments in advance. If you are relatively new to leasing, try breaking down the numbers one by one so you know what you are paying for. For more information check out my Guide To Auto Leasing.

The Lease Down Payment Dilemma

4/24/2008

So I received an email from a reader explaining the whole down payment dilemma in a very detailed and extremely convincing manner. It has, changed my view of down payments. I’m not saying I’d put down a large down payment, but if you got it, why not, specially if the interest is high on the vehicle you plan on leasing. Also, I do recommend everyone to call their insurance agents and find out how their policies treat leases.

So here are excerpts of the email sent by Damien from D.C.

“So I called my insurance company, Geico, and asked them about it. They report that their payout for a claim doesn’t rely on how the car was financed. That is, if they determine it is a $27k payout and residual value is $20k and you owe nothing, then you would get your $7k in cold hard cash.

I think what you are giving up is the GAP protection. In our example, you lost $3k. That would be the maximum you could lose, because there are no remaining lease payments and therefore there is no gap to protect.

Look at the other direction, where you pay $1000 to drive off the lot. In this case, your remaining lease payments are around $11k. The residual + the remaining lease payments is $29k, and the insurance company pays off $27k. This leaves a $2k gap, which the lease (if it includes GAP protection) would cover. In this case you only lost $1k, not $3k.

So it is a gamble, but not for the down payment amount. The gamble is for the gap, or depreciation. The depreciation is the highest when you drive off the lot, and should be $0 after your last lease payment.”

There you have it folks, I couldn’t have said it better myself. Props to Damien for this insightful email.
Now I gotta call my insurance agent tomorrow 😛

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Lately, I have been putting a lot of thought into the down payment. Generally, I don’t advise people to put down a lot for their initial drive off costs since in the event the car is stolen/totalled, you will lose all that is put towards the car. That typically happens because GAP coverage from either your insurance or the leasing bank only covers your remaining payments. However, I have been analyzing the financial effect of paying a down payment and it makes a lot of sense (assuming you never get your car stolen or totalled). Take this for instance, lets say I want to lease a vehicle that at a cap cost of $30,000. The residual value is $18,000 (60%) after 36 months This would mean your depreciation fee you are paying is 12,000, which you will finance at a rate of say .00101 or 2.42%, then of course, you pay your sales tax every month. Now lets say you put down 10,000 dollars, lowering your cap cost to $20,000, which makes your effective depreciation fee $2,000. This pretty means that you are being charged interest and sales tax on $2,000 versus $12,000, saving you a bunch over time.

Of course all of this comes at a risk. Get the car stolen or totalled in an accident, you lose the $10,000 in a flash. So, are you the gambling type?