Having received the same question multiple times within a week I figured this must be a hot topic. Are Prepaid or Single Lease Payment leases a good deal? Will you save money? What are the pros and cons? The two names are synonymous and every leasing company offers a single, upfront payment as an option. They just call them by different names. If you are not familiar with this type of lease they are exactly what they sound like. The consumer pays the entire lease amount upfront for the duration for the lease term. So what is attractive about this option? Buyers CAN stand to save some significant money if going this route. If you have sub par credit and still wish to lease this method can sometimes get over the credit hurdle.
The potential for savings in a prepaid lease is there but as a consumer you must:
- Fully understand how lease payments are computed in order to determine whether or not you are getting the deal that you think you are
- Lease a vehicle with a high residual value (some cars make for great lease candidates where others not so much)
- Lease at a low interest rate or money factor
- Understand the inherent risk in putting a large sum down on an item that rapidly depreciates and does not belong to you
When considering a prepaid or single payment lease the deal can be structured in one of two ways.
Method one:
The buyer pays the depreciation value in its entirety, sales tax (depending upon where you live) and interest (money factor) on the residual value. The leasing company has to put up the capital to purchase the car so the lessee pays the interest on that loan. The depreciation value is dependent upon the the lease terms that you have agreed to. In this method you are not paying interest on the depreciation and that can account for a sizable savings.
Method two:
More or less the standard algorithm for determining a lease payment. The monthly lease payment will simply be multiplied by the term of your lease. This method obviously saves the consumer nothing. In this scenario you should at least negotiate for a lower interest rate. However, you must remember that the interest rate must be reduced by a point or greater to result in any real savings.
Cons of Prepaid Lease:
- A significant amount of money has been tied up in investment. That money can be earning you more in something as simple as a higher yield savings account or used elsewhere.
- Prepaid leases are very difficult and costly to break.
- The consumer takes all of the risk should there be a loss to the vehicle.
- The car depreciates the moment it is taken off the lot. Insurance will pay the current market value of the car and not what you have invested. The risk of a significant financial hit is greatest during the onset of the lease and diminishes as the lease ages.
An example of both methods is broken out below:
| Method 1 | Method 2 | |||
| Negotiated cap cost (for this example we are going to use MSRP) | 30,000 | Assume it is the same car, same price, same residual and money factor. | ||
| resdidual value for 36/mo is 50% | $15,000 | |||
| Depreciation Value | $15,000 | MSRP (to simplify assume negotiated cap. cost is the same) | $30,000 | |
| Tax (VT sales tax is 6.5%). Consumer pays tax on the portion of the car that they are buying. In this case it is 6.5% of $15000 | $957 | Residual = 50% | $15,000 | |
| Interest on residual 5% or money factor of .0021 (rounded). Determined by multiplying by 2 since you are paying for both lessee and lessor interest. | $2,250 (62.5/mo x 36 (lease term) | Depreciation Value | $15,000 | |
| Total Lease Prepayment | Base Payment (depreciation/lease term) | $528 (rounded) | ||
| Depreciation Value | $15,000 | Monthly Rent or Interest – (Adjusted cap. cost + residual) x money factor. (30k+15K) x .0021 | $95 (rounded) | |
| Tax | $957 | Tax | $41 (rounded) | |
| Residual finance | $2,250 | Total Monthly Payment* | $664 | |
| Total Lease Prepayment* | $18,207 | Total Pre-payment* (monthly x lease term) | $23,904 | |
| *This number does not account for dealer documentation costs or titling fees. | *This number does not account for dealer documentation costs or titling fees. |
In method 2, if you negotiated the interest down 4% from 5% you would gain a savings of nearly $2,700. It is important to remember that leasing companies structure leases differently and method one of negotiating a lease may not fly with all companies. It is certainly worth your efforts to explore all options. Knowing is half the battle.
