Yes, leasing a car is frowned upon in the personal finance realm from a purely financial perspective, but there are those that swear by leasing a car despite the numbers. Leases generally have higher interest rates, restrictions on the vehicle (limited kms, tire wear, scratches etc), not to mention a perpetual car payment. On the other hand, there are some benefits of leasing which include lower monthly payments and the privilege of driving a new vehicle every 3-4 years. In addition, business owners can write off the lease payment in it’s entirety as it represents depreciation on the vehicle.
For me, I simply do not like reoccurring monthly loan payments that charge interest which is why we were aggressive in paying off our student loans, car loan and now our mortgage. So if I were to lease a car, I would look for ways to keep the payment do a bare minimum. The only way that I thought that was possible was via a down payment on the lease, but there’s another way according to a local Toyota rep that I was speaking with.
Not all car leasing companies allow this, but a larger security deposit may result in a reduction in the interest rate charged on the lease payments. As well, the security deposit is refunded at the end of the term providing the vehicle is in acceptable condition.
How does it work? With Toyota, the security deposit is equivalent to about one months payment which will give you 0.20% off the interest rate. They allow up to 9 times the security deposit, which would give you 1.8% off the posted rate.
A 2009 Rav4 base AWD lease would cost $456/month for 48 months @ 3.9%. However, depositing 9 times the security deposit of approximately $4100 would bring the interest rate down to 2.1% making the payments $421/month (according to toyota.ca).
This represents a difference of $35/month or $1680 savings for the term of the lease. The $1680 in savings represents a 41% after tax return on the $4100 security deposit.
So for those of you shopping for a lease, make sure to ask the dealership about the benefits of increasing your security deposit. It could save you thousands over the term of the lease which works out to be a very high (after tax) rate of return.