# "one pay" Lease?

I’m going to lease a 2016 Honda Pilot. I’ve read on this site and other places that you should never put anything down on a lease. I’d like to make sure this is still the case in my specific example where money factor and taxes are relatively high with a standard zero down lease.

The dealer I’m working with has prices online. Here are the two options I’m considering:

1. zero down, \$484.99/month (x 36 months = \$17,459.64):
http://www.weymouthhonda.com/lease/?&code=2016YF6H5GJNW&lterm=36&leasetype=4

2. “one pay” lease for \$14,984.08
http://www.weymouthhonda.com/lease/?&code=2016YF6H5GJNW&lterm=36&leasetype=3

The “one pay” option would save \$2,475.56

As I understand it, the risk is that the car is totaled/stolen. In this scenario insurance would pay the “market” value of the car. Does this mean that Honda would receive the residual value (\$24,321.15) and I would receive the difference between “market” and residual?

Yes, that’s exactly how it works.

In essence, when a car is totaled, the depreciation risk of a one-pay lease is similar to that of a conventionally financed vehicle. The risk tends to be greatest during the first few months into a lease, when depreciation is steepest.

Say the car has a selling price of \$40,000, a residual of \$25,000, and a one-pay lease of \$15,000. The car is totaled 2 months into the lease and insurance pays the market value of \$36,000. You get the difference between the market value and residual (\$11,000), which means you’ve paid \$4,000 to drive the car for 2 months.

With a monthly lease, depreciation is divided evenly into monthly payments, and you can simply walk away from the lease if the car is a total loss.

That said, the savings of a one-pay lease in this case are substantial, so you’ll have to weigh those savings against the probability of your car getting totaled or stolen.

Also, Honda is generally quite good with estimating residuals. The risks of a one-pay lease are higher on a car with inflated residuals. I’ve seen BMWs and Benzes where the market value equaled the residual value with months left on the lease – which would be bad if a one-pay lease car were totaled.

Hope this helps!

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Consider this: If you take the \$14499.09 and invest it and assume the average S&P 500 return rate of 11% annually:

After 3 years, your investment should reach a value of \$19,829.40

Lets consider an average return of 7%:
You still end up with \$17,762.01

It doesn’t make sense to pay in full when you are borrowing the money at less than 5% annually.

Yes, very helpful. Thanks for the quick reply Michael. I went into this thinking that the “one pay” lease was a great savings. I’d be OK with taking on some risk for a couple months, but when I ran the numbers it isn’t until month 28 that the risk is gone!!!

See attached if you are interested in how I arrived at month 28. I don’t believe it is possible to have an actual market depreciation schedule, so I started with the True Car price and guessed the 6 and 12 month value. I used the residual value for 24 and 36 months. I then evenly distributed the depreciation between each of these points (best I could do). The last column in the attached spreadsheet provides the profit/loss between zero down vs “one pay” if the car is a total loss at each month of the lease. Let me know if I can improve this model.

Here are the assumptions (or best guesses)…

MSRP: \$38,605.00
Sale Price: 35,546.09
True Car Average paid: \$37,386
6 month market - \$34,000??
12 month market - \$30,000??
24 month residual - \$26,637.45
36 month residual - \$24,321.15

“One pay” is a risky deal for the first 27 months. It is only a great deal if you make it to the final month or two.

This exercise for me really proves huge value in leasing over buying (or “one pay”)…which is to avoid depreciation risk! Seems like they could offer some insurance for the “one pay” option. I’d happily do “one pay” if I could get some insurance on the risk.

Slomo, thanks for the reply, but you can’t assume 7% or 11% return, especially in a three year time period… Unfortunately the S&P has had years with 9%, 12%, 22% and 37% losses this century…of course there have been some good years too, but there is definite risk. The “one pay” option is a guaranteed return. You can’t touch that rate in CDs or T-Bills.

Interesting analysis! Thanks for sharing.

The average return of the S&P from 1871 to 2014 is 10.77%. The annualized return over that same period is 9.11%. No investment is guaranteed and there is always risk. Your “one pay” option also includes a risk and does not provide guaranteed return as you mentioned. As you said it yourself, it is a risky deal within the first 27 months.

Also, are you set on the Pilot? The 39 month QX60 lease mentioned on the front page last month appears to be about \$100 less per month.

Right, that QX60 lease is a great deal. The gap closes when you add in comparable features (AWD, remote start, 12k miles). I made a pitch to “the boss”, but was she prefers the new Honda.

Do you guys know if Honda does MSD?

I don’t think Honda does MSD.

I myself do 1-pay leases and MSD leases whenever possible. When I looked into insurance coverage in case of a total loss, I was getting conflicting information. It is also very difficult to get an answer because most people don’t even know what it is. I believe from my research that what is covered differs between insurance companies. I would recommend to whoever is considering a 1-pay lease to contact insurance agent by email and get in writing what/how much is exactly covered in the event of a total loss.

Resurrecting this because I’m seeing conflicting information as well.

@michael says in his example:
“Say the car has a selling price of \$40,000, a residual of \$25,000, and a one-pay lease of \$15,000. The car is totaled 2 months into the lease and insurance pays the market value of \$36,000. You get the difference between the market value and residual (\$11,000), which means you’ve paid \$4,000 to drive the car for 2 months.”

However, I see a clause in the lease agreement (GM) that says “You will receive a credit for the Unused Base Scheduled Payment”, which, if I understand correctly, would be roughly the one-pay lease amount/24 months (or whatever). So, I would think that the leasing company would get the whole \$36k (market value of car), and I would get back all but 2 months of payments out of the \$15k one-pay.

This makes sense to me, really the one-pay is just be a matter of prepaying to avoid interest, not a way to increase in overall risk.

Anyone else have input on this?

For GM, it is clear they refund the unused portion of the single pay lease. I would imagine they all do, but as you say, need proof.

When comparing savings from one pay lease with extra cash from CDs/treasures keep in mind income taxes.
You don’t pay income taxes on the money you save, but you pay income taxes on the money you earn.
Thats one of the reasons MSD/one pay a so attractive.