Turn your lease into a high (10%+) yielding investment

This is not another article trying to tell recap strategies you can find on edmunds, or auto trader, ect.  If you are ready to lease a car or truck and already figured out how to negotiate and get a deal, this will help you take it one step further to maximize your saving on your auto lease.

There requirement is that you have some additional cash that you are not in need of for the lease term.  (I know the alarm bells are ringing when you hear this... but bear with me).

The concept it is to take advantage of a program actually designed for borrowers who can not qualify for the top Lease Money Factor (interest rates).  Using this program you essentially create a bond structure that will pay you the equivalent of a 10-15% annual yield that is applied (basically subtracd) from your total lease payment.  

The idea is that you place the security deposit with the Auto Lease company and they will reduce your MF on your lease.  So in this example, you put $5,200 into the security deposit program.  You will recieve the deposit back at the end of your lease.  However your lease payment will also be reduced (by $64.63 in this case.)  Over the course of a year, you recieve $775.51 to towards your lease (payment reduction) tax free for having the $5,200 security deposit.  12 months x $64.63 = $775.51 / $5,200 = An annual return of: 14.9%

This method yields the greatest benefits when you negotiate the least amount down as possible, and the finance company offers the greatest discount per security deposit as well as number of security deposits.  Toyota uses about .00008 per security deposit up to 9 times where is BMW around .00007 and up to 8 times I believe.   

Step 1:  Call the dealer or do research on typical websites about MSD or "Multiple Security Deposits" programs.  The typical program will allow you to buy down you money factor by .0001 or more for each multiple of your payement you put down up to a total of 8 or 9 times.  

- so if your payment is $527  and you put down $5200 into the security deposit program, you can  buy down your money factor (MF) by .00008 x 8 = .00072.  

- If you are familliar with MFs you can convert a MF to a interest rate by Multiplying by 2400.  So you can reduce your interest rate by   .0008 x 2400 = 1.92%

Step 2:  Do the calculation on what you can save.  I'll use a lease i did recently as an example:


-  MSRP:  55,184
-  Negotiated Price:  48,481
-  Down Payment: 0.00 (just license, reg, and bank fee)
-  Residual: (59%) 32,559
-  Money Factor .0015
-  Lease Payment $585.66 + tax

W/ MSD (8 times)

-  MSRP :  55,184
-  Negotiated Price: 48,481
-  Down Payment: 0.00 (just license, reg, and bank fee)
-  Security Deposit: 9 x (526.78+tax) = $5,200 (toyota rounds to $25)
-  Residual:  59%
-  Money Factor  .0015 - (9*.00008) = .00078
-  Lease Payment  $526.78 + Tax

Difference per month in payment: $58.88 (plus tax difference)  in CA it would be $642.76 - $578.14 = $64.63 difference with tax figured into both payments.

$64.63 x 12 = $775.51 per a year for the $5,400 I put in security deposit.  That's a annual yield of about 14.9% .   Not bad for lending money to Toyota for 3 years.  

Step 3:  Then decide if you can put your money elsewhere with that kind of return for very little risk.  (If you do your financing through a major Automotive company's captive  financing arm. (Toyota is a AA credit, BMW A, Mercedes A,  VW A ratings).  

If you are going to lease a car anyways, and have spare cash to invest, It's almost impossible to find a better way to invest your money.  This might only come 2nd to paying off a even high interest rate credit card.  In today's rough market and low interest rate enviroment, this is a very attractive alternative.

Don't confuse this with putting a down payment.  At the end of a lease, you get your Security Depoit back, you don't get a down payment back.  Auto dealers are trained to give you the lowest payment possible so they will tell you it's better to just put the money as a down payment.  But remember, you won't get a down payment back!  

The fact that you get such a large reduction in our lease payment and get the money back after the lease is what makes this structure so attractive.  Be sure that the money your put up for the multiple security deposits is listed on the lease contract as so and NOT as a down payment or cap cost reduction.