Risk vs. Reward: Putting Money Down on a Lease

Help me out with the math and logic on this, noting that I’m not going for perfection. I’m just trying to get to a ballpark estimate.

I’m open to correction on the logic and/or using more recent, more authoritative stats. Please offer better stats if you have them, vs. just dismissing these as too old or too [whatever].


Premise: You should never put money down on a lease, because you could lose it in the event of a total loss.

Reality: The average driver files a collision claim once every 17.9 years.

A collision on a two-year-old vehicle will result in a total loss about 6% of the time (I didn’t see the source data in this article, so I had to use my eyeballs to estimate):

So over 60 years of driving, one would be expected to file

60 / 17.9 = 3.35 collision claims

of which

3.35 * 6% = 0.2 would be a total loss.

So on average you have a 1 in 5 chance of totaling one vehicle over 60 years of driving, or one total loss every 300 years.


I’m also interested in ideas on where to find data on the average lease transaction to calculate how much money one could save in rent charges by paying, say, a 20% CCR on 20 consecutive 3-year (or 30-consecutive 2-year) leases over the same 60-year period.

My sense is that NOT doing CCRs over a lifetime of leases is going to calculate out to an extremely stiff cost to mitigate a comparatively very small risk.

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I’ve said something along similar lines before about totaled probabilities and it’s probably pointless because of:

  1. The psychology of loss aversion.

  2. The “keeping my payment below $XXX” crowd will jump all over this to justify their own mental gymnastics and lack of understanding, which probably wasn’t your intention.

I’m missing the reward part of putting money down on a lease…There literally isn’t one as long as your MF is not astronomical…

The issue is that you would be screwed if your car is totaled whether it’s your fault or not. Could be sitting in your driveway and a plane falls on it. The average lifetime risk means little. The impact if it does happen is much more significant. You would be out of your down payment AND need to front money for a new car. And what if you’re on the unfortunate side of the bell curve? 2+ accidents in 60 years is not unimaginable. If your credit is good, you get good rates so you want to borrow as much as possible (within reason). The money is better used elsewhere.

Give an example with numbers. How much would you save in rent charge for X amount down? Due to the way CCR and rent charge works, I don’t think you would get your money’s worth on a down payment.

One step at a time; you didn’t read the entire post.

Perhaps you’re not in my target audience. :stuck_out_tongue:

Yes. It’s probably a loss either way. We’re discussing losses.

This would happen once every how many years?

How would you decide how much extra to pay out of pocket to mitigate a risk?

Yes, that’s the type of loss we’re discussing.

You lose more than someone who’s on the other side of the curve. This is how statistics work.

This is statistically true in some areas, not in others.

That’s the second part of the analysis, which is outstanding. I addressed this in my first post.

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Rent charge (per month) is [(Net cap cost + residual) x MF]. Based on that alone, you aren’t “getting your money’s worth” on a down payment. The prevailing sentiment is that down payments are not worth the (small) savings. If you want to present a case for the other side, you have to back it up. I don’t care if you are championing the idea or just bringing it up. You addressed the risk. How about the benefit? Pick any deal posted here and work out the numbers.

Even assuming you never have a car totaled, it would come down to ‘can you do better than X interest rate with your money?’ So it comes down to “it depends.” Personal judgement.

Please refer to my previous response.

… and my first post, to which I referred in my previous response.

Looking at the lease deal I’m currently considering ($80k BMW at .00082 MF), putting $10k down lowers the total 3 year lease cost by $300.

So for modeling purposes, if I leased the exact same car 20 times in a row over a 60 year span, I would be saving $6000 in total lease costs by “risking” $200,000 in total down payments.

Of course the higher the MF the more $$ you’ll be saving by putting money down, and the example above is using BMW’s relatively low .00082. Switch in say .00200 and the $300 I would be saving jumps to $800 per term or $16k total over the 60 years.

Either way the risk/reward just isn’t there, for me at least. I’d much rather put that $10k in the market, where even at 5% average returns it makes me ~$1,500 over a 3 year term, vs. a savings of $300 or even $800 worst case.

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I did read it in its entirety. Hence the second part of my post regarding high MFs. The savings are negligible considering the potential downside.

Another factor to throw in is the decaying value of the car over the lease period and realization of the down payment.

  • The cost to fix the damage on a car is going to be fairly flat for a given accident over your lease period. However, the % of total car value will increase.
  • Also as the lease matures, you’ll have realized more of the down payment. Getting “totaled off the lot” vs totaled 2 months before the lease ends makes a huge difference. In the former, you lose your whole down payment. In the latter, you only lose a tiny amount, but have saved money for the previous months.

We could probably make a few curves and see where they intersect to make the best financial judgement.

Lastly, there’s probably a car value threshold where above, its next to impossible to total a car outside of a major accident (talking the car is near unfixable).

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“Looking at the lease deal I’m currently considering ($80k BMW at .00082 MF), putting $10k down lowers the total 3 year lease cost by $300.”

You could also sprinkle in opportunity cost. In the example above, you’re tying up $10,000 to make a 3% return over 3 years.

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Thank you @j_e_f_f and @TheAvia7or for offering logical responses.

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I think this is where this @trism’s thought experiment makes the most sense. For high-MSRP, not-very-savvy, high-base-and-heavily-marked-up MF, Zero-Drive-Off buyers, the gross (not relative) 50 year savings could be significant.

A hypothetical 36/12 lease on a 100k SUV with a 0.00225 MF, 5% discount, 55% residual, and no rebates/incentives will cost 1605/mo or 58.5K in CA (Calc). Applying a 10k/20k/30k down payment brings total lease cost down to 57.6k/56.7k/55.8k (savings of $900/1800/2700) respectively.

In this instance, your CCR “Rate of Return” is 9%. Not too bad huh?

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Shall we conflate things with states where CCRs are taxed, increasing the savings if the car is totaled?

So basically, what I’m finding is that the Risk side of the question is quite low unless you buy a lower priced vehicle or live in Iowa with its 50% Value totaling threshold.

image

(I didn’t do the TLF value thing, because thats just too complicated for 10am on Saturday)

I found a recent forum post for a 2021 BMW M340i lease and based the car values off that.

  • I’m assuming the 10.5% discount + $2000 in incentives they got is a fair value for the car at new.
  • I’m also assuming the residual values at 24 and 36 months (62% and 58% respectively) are decently representative of the car value.
  • I fit a curve to these 3 points to get the car value over the lease period

The gray and orange curves represent thresholds where the repair would need to exceed that value to be considered totaled. If all the above was true (yes I know BMW inflates residual, blah blah blah):

  • In Iowa (50% value), you’d really only be in the medium risk region towards the end of your lease. A $19,000 repair job is fairly significant damage to a car but not impossible
  • In most other value based states (generally in the 70%-75% value), you’d have very little risk of totaling your car in most accidents. A $30,000 repair is a nearly wrecked car.

Now take this same $65k bmw and turn it into a $26k Honda Accord and now all of a sudden you’re at high risk to total almost all the time.

Once you have the risk side over. You can look at the cost side and figure out if X/mo saved from down payment is worth it (vs other things you’d rather do with the money).

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@trism I can virtually guarantee not a single mind will be changed, no matter how good the returns you show

You can try .00300+ MF, untaxed CCR, etc etc it won’t matter.

Also…if a car has such bad lease terms (high MF and low RV) that putting a big down payment results in a savings so significant that I would even consider putting a big downpayment, then at least personally speaking I wouldn’t even consider leasing it at all vs. just financing it.

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I’m not trying to change anyone’s mind, I’m just suggesting that people do a realistic analysis and make a conscious decision.

What’s hysterical to me is anytime the conversation turns to MSDs or down payments, the detractors show up and suddenly everyone is Warren Buffet.

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Speaking of all the Warren Buffets around here, comparisons to investment returns are dubious because it’s a false choice.

It’s not like most of us have thousands of dollars sitting in a drawer earning nothing, and then on the day we decide to lease a car we have to confront the tough decision of either handing a stack of hundred dollar bills to a dealer as a down payment or putting those same $100s into a brokerage account and buying ETFs (or whatever), which will be invested for the remainder of our natural lives.

I wouldn’t sell securities or other investments to make a down payment, but rather the money would come from a liquid savings account where it would currently be earning somewhere between 0.5% and 0.7%.

You can eyeball that against the APR equivalent of the MF as an initial litmus test, and assuming there’s upside, it’s basically all upside since the loss is statistically a once-per-300-years event with a max downside equivalent to your down payment amount (four figures?).

To me, non-catastrophic losses are rarely worth paying out-of-pocket to insure.

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