Car Leasing Tip – Increase Your Security Deposit

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.

The Strategy

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.

An Example

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.

Final Thoughts

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.

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Bill
9 years ago

I notice that GST (13%) is caculated on top of my monthly payments which already has the interest included (blended) on the borrowed VALUE of the vehicle.
Shouldn’t GST be payable only on the borrowed VALUE? It is like I am paying GST on the interest part too.

Bruce
10 years ago

A bit off topic, but i have leased cars and the last one was with toyota, at the lease end, they hammered me on the return of the vehicle. Small scratches and normal wear antear were deemed as major Damage and neede repair. O course they wnated me to pay this or they hit my credit rating.

Good for Toyota, they get a fixed up car to sell in the auto auction at my expense.

So, be careful who you lease from.

BGone
11 years ago

A representative at the local West Coast Toyota dealer in the Metro Vancouver region told me each deposit only takes 0.01% off the lease rate. Was that a mistake, or is this 0.20% per deposit not available in BC?

MStar
11 years ago

food – I totally agree with you!

The only way to win financially in the ‘car game’ is to buy 1-3 yrs old…Dont pay for the high depreciation in the first few years. Especially if your going for a honda/toyota that last forever…the 1st few years are not going to have much wear and tear on the longetivity of the car.

I only buy used (but only 1-3 yrs old…so it look and drives pretty new to me)..b/c at the end of the day…they are not assets (in my def’n anyway) b/c they depreciate and take money out of my pocket monthly (maintenance,etc).

Although, if you are looking at the utility (or statisfaction) instead of finanically wise…then I can understand the notion of leasing a ‘brand new’ car. And thats fine as long as you recognize financially its not the greatest move.

JK
11 years ago

M – I totally agree with you.

The only trick to do this is to find the least painful way. It’s interesting that the RAV4 got chosen as the example here!

My wife and I leased a 2008 RAV4 in December 2008 (at the very tail end of the model year) and the lease rate was 1.9% for 3 years. Our sales rep also informed us about the Multiple Security Deposits program. When everything is said and done, our lease rate went down to 0.1% – essentially an interest free
loan!

We will buy out our RAV4 at the end of the term.

M
11 years ago

Cars are a losing game, no matter which way you slice it. Pick your poison. In the end they’re still a depreciating asset.

food
11 years ago

Buying and leasing new cars is for suckers. Let it depreciate for a year, find out if it’s a lemon and then buy or lease it. I got a three year old car that was originally $50K new for $20K. My payments are $350 on a 48 month and the car is beautiful after one year so far. Have done nothing but change the oil and it works great. I drive too many miles to give it back in the end but my buyout is $6500. I am fairly certain I can get somewhere close to this in three more years. I may have to do the brakes and some minor suspension work but as far as I’m concerned I could have gotten a new civic or a sightly used (50 Kms) luxury sedan for the same price if not better.

Briefcases
12 years ago

Interesting strategy. I have always been taught that leasing a car is a bad idea. Financing a car always seemed to make more sense. Still if leasing makes more sense for your situation, it is good to know how to save some money.

Amanda
12 years ago

Interesting — I’m pretty sure we didn’t put down a security deposit at all on our leased car. We ran the numbers, though, and found leasing to be the cheapest option as long as we buy it out with a lump sum at the end. This was partly because we don’t pay interest on the full remainder value of the car and the interest rate was not only the same as financing (1.8%), but also much lower than we could get by putting the lump sum for the remainder in a GIC (4.4%), so we made more money putting that lump sum away for the four years to buy out the lease than by putting it down to purchase the car up front. We were also looking at a car with very high resale value (Subaru), so it didn’t save us much to buy a slightly used one and we wouldn’t have the “incentive” interest rate (a result of buying a 2006 model in August 2006, right after the 2007s came out) or that extra couple years of warranty.

Of course, since we’re planning to buy it out, we’re not too concerned about going over the kms (not a chance anyhow) or that little scratch on the bumper!

cannon_fodder
12 years ago

I think another advantage to leasing a car is if you are unsure you are going to like it for the long term or you anticipate changes to your household.

For example, you’ve never owned a convertible and aren’t sure if the romance will quickly wear off – especially in the winter. With a lease you can decide to walk away and not have the hassle of finding another buyer. On the other hand, if you truly enjoy your vehicle the buyout option is usually better for you than just walking away.

Another example would be if you weren’t sure whether you were going to start a family. A coupe is not practical with small children and the leasing arrangement can make it easier for you to either walk away or even work with the dealer on rearranging a lease for a more suitable form of transportation.