Greetings All,
On my latest lease I opted for MSDs to reduce my payment by $40/month on a 36 month lease.
This is total savings of $1400 over 3 years by doing 10 MSDs at $450 each for a total of $4500.
What could I have invested that $4500 in that would be more profitable than the $1400 I’m saving on the lease over the course of 3 years.
It seems MSDs is a rare thing to do and my finance guy didn’t actually know how to do MSDs and had to get help from someone else to do it.
That got me thinking. Why is it rare? Why are people not doing this more often?
Some people seem to believe they are better off investing that money themselves but for my specific scenario where can you invest $4500 and earn a guaranteed 10% ROI annually after taxes? Also what does the company do with the MSDs while it’s in their possession?
Nowhere 10char
MSD can hurt transfer liquidity which may not matter but the main negative I can think of. The transfers which expect msd plus money down generally are the ones which sit longest IMO. Most folks don’t transfer but something to consider theoretically.
I don’t think a large majority of the car-buying public really understands how leases work, beyond potentially providing them with a smaller monthly payment vs. a conventional loan, let alone that MSD’s are an option to lower their rent charge. I’d also go out and assume that the same large majority isn’t willing to (or can’t) fork over a few thousand dollars in the near-term to save money over the subsequent 2-3 years.
5% would return $675. So $1400 about double.
One of the things that I notice some on LH tend to overlook is that one is reducing your expenses and the other could increase your income or net worth. This point is kind of obvious. One is guaranteed, the other isn’t.
However it’s rare to see a post on here account for taxes should you choose to invest the money with a hypothetical 10% return assuming you sold the stock or whatever other instrument you chose. I always stress people to do the full equation & not just part of it where it benefits one the most.
As @eiva mentions, it’s a large population that doesn’t have the extra money in the first place. Anecdotally a friend of mine was bewildered that I did a one pay lease due to in his words, he wants to “avoid the downstroke”. I did it because it saved thousands.
A former co-worker once was so proud of no money down on a Dodge Ram purchase. It’s their money so they can do what they want however most just don’t have the money but want a new ride and as long as they can “finance” it, all is good in the world.
All good points. One more:
You really should be debt-free (other than maybe a very low interest mortgage or have no or super low interest debt) to make sure your MSDs are the best use of your money and that you have exhausted (for the year) all other tax-advantaged and matching contribution retirement/investment accounts you have if they yield better overall returns with taxes and matching applied. Also if you have other debt that will require more service payment on higher interest, fees or whatever than your return on the MSDs amount will be then pay that debt off first or you are still lighting fire to your money.
TL:DR - If your return on MSDs is hypothetically 10% and you are paying debt service on anything else above a 0% rate (or even a mortgage after your interest is deducted) or are not maxing the contributions mentioned above, then you are not getting 10% back on your money overall.
Not investment, tax or legal advice, and YMMV.
I still would do MSD over like a 3% mortgage or any kind of loan. I would say 6ish percent and north is prob where I’d put the money towards the loan. Yes for sure should max all tax advantaged accounts first as well
For sure on a mortgage, that’s why I said this:
Any kind of loan? Depends on term, rate and pre-pay penalty if any.
Oh woops ya missed that my bad
Still curious about this if anybody has an answer.
Invested somewhere, as they will somehow make money on your money and then pay you back.
What are they investing it in that gets them a better return than what I’m saving?
It has to be on both sides of the BS as ROU Asset & a lease liability. It’s been a little while since I did a deep dive on ASC 842 but that may give some insight.
From my knowledge they are taking this money and can use it in a variety of ways. Keep in mind an automaker has access to treasury management rates the average person doesn’t. They can take that same block of money that lowered your interest rate and lend it to someone at a higher rate. Or it may be at a lower rate but it still is subsidizing whatever use they have for it.
It’s a function of each business’ cost of capital and the allocations they choose. BMW FS will sometimes offer below market interest rates in order to make more money by manufacturing vehicles.
Not chasing down deadbeats at the end of their leases
Which is odd, as that is a problem that is normally seen and avoided up front with the sketch CR.
A lot of great answers in the thread. Most people don’t understand how leasing works, don’t have enough money on the side, or have higher interest debt, and so on.
What I’m curious about is:
Is it possible dealers don’t want customers using MSDs because it lowers the money factor, and they make less backend profit on the loan? I don’t know, maybe less commission?
Finance manager swore he never heard of it before. Said he’s been working in the industry for 10+ years and never heard of MSD. If I were a finance manager I’d be offering MSD left and right to get people lower monthly payments if they can afford to park that money for 3 years. He was more interested in selling me the tire and wheel package for $3500.
All true. In general I don’t think they can invest an MSD for a term longer than the lease maturity. For the non-bank captives I assume they could invest MSDs in their own corporate debt as long as the bond matured before the lease term? But T-Bills and short-dated fixed income. AFAIK only NY has the rule about individual escrow accounts, which is why most captives don’t offer msds in NY
If they only worked in NY, but even then?
There are brands that don’t offer MSDs so if you only worked at Subaru and Mazda (when it was Chase) and Honda, you might only know Security Deposits are a thing because of the auctioneer disclosure at the end of a TV Cadillac ad.
I believe it is rare because many folks do not have sufficient funds to do the MSDs.
Short Tesla
