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.
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.