Please help me understand immediate lease buy out

Ask the Hackrs
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Hello I need some help understanding the figures on a very early lease buy out. I have a Kia EV9 on preorder and it should be arriving in the next couple weeks. The $7500 lease incentive is appealing, but the idea of leasing isn’t. We tend to hold onto cars for 8-10 years and love having a nice car with no payment.

When doing a lease buyout in the first month how does one figure out what the buyout would cost? I assume it would be less than the RV plus total lease cost. Would be just the capitalized cost?

I’ve read I need to be careful of the possibility of double taxation on a buyout. What else should I be aware of? Is it worth trying to potential pitfalls to save $3000ish?

Thank you.

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If you buyout within 30 days of lease inception, then the easiest way to compute the adjusted lease balance is as follows…

adjusted lease balance = (adjusted cap cost - 1st base payment) x (1 + RATE)

Your buyout is the adjusted lease balance plus any applicable taxes and fees.

The 1st payment is due at lease signing in which the entire amount is treated as a depreciation payment. However, interest (rent charges) is always levied one month in advance.

See my post for more details…

Help Needed: Early Buy-Out Calculation Discrepancy for 2023 Ioniq 5 - Ask the Hackrs - FORUM | LEASEHACKR

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Quite technical. In general, is buyout in first 30 days going to end up cheaper than purchasing it outright?

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Yes, when there is almost 5 figures worth of lease incentives available.

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I read the linked post. Can you help explain the RATE calculation in laymen’s terms? Is it something other than the MF?

Thanks.

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Yes, it is different than an MF. Like a loan, RATE is the periodic (monthly) interest rate used to amortize the lease.

For most leases, at lease signing (beginning of the 1st month), your adjusted lease balance is

(ACC - 1st base payment)…

The entire first payment is treated as a depreciation payment as you are paying it at lease signing in advance. Immediately after the 1st payment, the bank has earned interest for the first month as it is considered fully earned one month in advance. So, if you exercise your purchase option at any time within the first 30 days (1st month), you will owe (ACC - 1st base payment) plus interest computed thereon. Thus, your adjusted lease balance at any time during the first 30 days is…

(ACC - 1st base payment) x (1 + RATE)

In addition to this amount, you will owe a purchase option fee, if any, plus any applicable taxes and fees should you exercise your purchase option. See your lease agreement. Each month, interest earned is deducted from the base payment to arrive at that month’s depreciation which, in turn, is deducted from the previous month’s adjusted lease balance to arrive at the current balance.

The adjusted capitalized cost (ACC) is analogous to the loan amount. Interest accrues one month in advance and is considered fully earned.

RATE can be calculated using excel’s RATE function with the following syntax…

RATE = RATE(term, base pay, -ACC, res value,1)

Again, RATE is the lease amortization interest rate implicit in the lease. Lease contracts refer to it as the actuarial or constant yield rate. Read your lease agreement where it talks about early purchase and how the adjusted lease balance is calculated. It should be very similar to that described above unless it’s a Chrysler Capital Lease (CCAP).

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How would this work if you did a one pay? Would it just be the RV plus applicable taxes, and any listed fees?

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One pay buyout is the RV less any unearned rent charge, plus taxes and fees, so it starts out quite a bit below the RV (depending on mf) and increases monthly until the unearned rent charge is $0 at lease end. (Your buyout gets larger each month, not smaller)

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As an example, for GM Financial Single Pay leases, the adjusted lease balance is calculated as follows…

image

Translation…

image

RATE is the periodic (monthly) constant yield rate implicit in the lease. It’s assumed that all payments are made on time. Most lease contracts compute single pay adjusted lease balances using this or an equivalent methodology.

NOTE:
Using the Excel RATE function with the following syntax:
RATE = RATE(term, -(ACC - Base Single Payment Option), Res Value, 1)
Annual Constant Yield Rate = 12 x RATE
ACC = Adjusted Capitalized Cost

EDIT: Also note that…

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Tax is usually levied on the single payment option. The single payment option BEFORE tax is levied is called the BASE Single Payment Option.

EDIT: You’ll need to add any applicable fees and taxes to the ACC to determine the buyout price.

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You can also…

image

Another way to find the ALB for the single pay option is to use the PV function in Excel …

ALB = PV(RATE, # of months remaining, 0,-rv,1)

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Finding the unearned rent charges requires a lease amortization schedule or a formula. I believe the easiest way is to find the present value of the residual using the formula or the PV function in Excel described in my post above.

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I’m seriously considering Getting an EV9 and doing an immediate lease buyout to get the $7500 rebate and still own the car. This is my first experience with Leasing. I usually buy a car and own for 10 years.

How do I best position myself for the buyout? What are the downsides of a large down payment on a lease? Do I do minimal cash at signing and then use cash and a loan to buy out? We are looking at a significant down payment (30-40%) to buy. We may trade in our current 2014 fusion hybrid. I recently got a good carvana quote. I’d be happy if the trade in matched that quote or maybe we will sell ourselves.

I need to work with my dealer to get detailed lease numbers and make sure I’m making the right move. Once I have those figures I plan to call Kia and ask some detailed questions about their buyout process get some more accurate figures and try to anticipate any unexpected fees.

I’ve already checked with 2 lenders offering reasonable rates (5.27% and 4.99%) and they will finance a lease buyout. Obviously I would want to have the buy out loan lined up before signing so we can move quickly after signing.

What else am I missing? Thanks.

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Yes.

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Some things to think about…

  1. I wouldn’t make a large down payment on a depreciating asset whether you lease or buy. If you total the vehicle, you may not be able to recover all of your down payment.

  2. I wouldn’t tell dealer that you’re planning to exercise your buy option. Instead, I would ask for a larger dealer discount in exchange for a higher money factor. Don’t mention a higher money factor… let them suggest a higher MF in exchange for a larger discount. Otherwise, they may get the sense that you’re going to buy the vehicle which may impact their front-end and/or back-end profit. Not sure how that works as manufacturers do it differently. Be sure that it’s an equitable exchange in case you can’t do a buyout for some unforeseen reason. If you’re absolutely sure that you will buy, by all means, get as high of a discount as possible. The cost of money (money factor) can be sky high, and it won’t matter much.

  3. Collect all the pertinent data and crunch the numbers including calculating your lease buyout. I can help you with this, if you like. Ask the dealer for a copy of a blank lease agreement. Read it to see how to compute the adjusted lease balance and buyout price. Calling Kia will probably be a waste of time as you’ll likely be speaking with a customer rep who isn’t acquainted with such calculations. The lease agreement is the authoritative source and is the only thing that matters. It doesn’t matter one hoot what someone from Kia verbally tells you.

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What’s missing is the reasonable market rate to be paid for the vehicle

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Doing the math according to this thread, on my vehicle I have:
$71590 MSRP
adj cap cost 62707.33
RATE = .705 [excel: =RATE(36, 895.77, -62707.33, 43944.4, 1)]
adjusted lease balance = (62707.33-895.77)*(1+.705) = $62248.23

Is this correct? I put 3000 as the first payment (included mostly fees) along with a 7500 rebate. What are other common expenses at buying this out in the first month? There is a disposition fee of $400. I would also assume a sales tax of 5.5% here. Thanks in advance

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This whole thread majorly helpful. Just wanna say thanks.

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No reason to assume any of this. Where is “here”?

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That is the sales tax rate for this area of Wisconsin. While the lease is ongoing there is a use tax monthly

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