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
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.
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.
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.
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.
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).
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?
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.
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.