Can you explain in detail how the 5 refundable security deposit thingy works…?
I live in Wisconsin so I am not sure if some of what is on this site is the same here as it
is in California… although I am only 1 1/2 hours away from Minneapolis St. Paul…
Thanks!
Hi there,
Some brands, such as BMW, Mercedes, and Infiniti, have a Multiple Security Deposit program, which allows you to lower the “money factor” (i.e., the interest rate on a lease) by putting down a security deposit. This will reduce the finance charge and result in lower payments.
For example, BMW’s current MF rate is .00131 (equivalent to 3.14% APR). Each security deposit lowers the MF by .00007. If one were to place 7 security deposits (the maximum allowed by BMW FS), then the MF would drop from .00131 to .00082 (1.97% APR).
Using multiple security deposits (MSD) can save hundreds, if not thousands, over the term of the lease. Unlike a down payment, you get your security deposit back when you return the car.
You can play around with MSDs on our Lease Calculator: http://leasehackr.com/calculator
Note that not all manufacturers offer a MSD program and that MSDs are not available in NY.
Michael
I’m new to the idea of MSDs as well and am curious, what are the downsides of using MSDs?
Is there any case where you can’t get the MSDs back (ie: if the car is totalled/stolen, etc.)?
Good question.
Say the car is totaled and your pay-off is $16,000. But the fair market value of the car (i.e., the amount your insurance company will pay) is $14,000. Nearly all leases from a manufacturer come with GAP insurance, which will cover the difference of $2,000. This way, you can walk away from the car without incurring any penalty.
Once the manufacturer gets its pay-off amount back (i.e., residual + remaining payments due), they will return your security deposit.
We prefer a MSD to a down payment (aka, capitalized cost reduction). Say you put a down payment of $2,000 to lower the amount financed. The car is totaled. Assuming the same car, the pay-off amount is now $14,000 (because you paid $2,000 upfront already), and your insurance company pays you $14,000. You can walk away from the lease – but you’ve lost your down payment amount. GAP insurance never kicked in.
The only MSD downside I can think of is the lost opportunity cost of capital… but then again, what investments can get you an ROI of 40%+?
Explain how this would be a ROI of 40%? I still don’t get how giving up a significant sum of money to reduce the money factor a little bit, make any financial sense. Probably why it is not allowed in NYS, because it’s a bad deal for the consumer (we might be a highly litigious state to live in, but there’s a reason, lol).
I get that with each deposit (what is a typical deposit amount anyway, $1k?) it reduces the money factor by .00007 - which if multiplied by 2400 = .16%. If the money factor is low to begin with, then I see even less how this makes sense. But it must be a combination of starting out with a fairly high moneyfactor, and a vehicle with a high cap cost, where every little equation could save you considerably. On a higher end Mercedes or BMW, I might see how this makes sense. On a Honda Civic, I don’t get it.
Guess it’s all moot for me anyway being in NYS, but I want to understand, lol.
The idea here is that your lease is a sunk cost, in that you’re buying it with or without a MSD factor.
Here’s how it works out as an “investment” in that scenario. Really I use “investment” in quote for a reason, as it’s not really an investment. It’s just a reduction in costs of your lease, but if you were to assume you were leasing regardless, it’s a great return.
BMW lease, assume $50k car for 36mo and 60% residual for easier math.
Original MF of .00131
Max MSD MF of .00082
Original MF lease finance charge = $3,772.80 = (50000+50000x0.6)x0.00131x36
Max MSD MF lease finance charge = $2,361.60 = (50000+50000x0.6)x0.00082x36
Monthly payment for this lease would be $621.16, so a $4,550 deposit for max MSD.
This results as if you were to include a MSD, you can reduce your payment (total lease cost) by $1,411.2 and thus a “return” of 31% in the 36 months on your “investment” of a MSD.
I’m still confused. How much is each MSD? Is it 1000 per MSD?
You may be able to find more details in this thread: