Pay off the lease. no brainer. Dont forget, this is 7000 after tax.
I've got 24 months left on my 48 month lease I still owe $21,830 in principle and about $7,000 in interest on top of that.
I didn't get the greatest lease rate, 6.95%
If I continue to make my normal monthly payments for the remaining 24 months I will end up paying about $7,000 in interest.
If I pay off the remaining 24 months ($21,830) of my lease all in one lump sum payment now I'll save paying that $7,000 worth of interest (and won't have to worry about making any more monthly lease payments.)
And of course when the lease is up in 24 months I simply give the car back like I would have anyway. I don't intend to buy out the car at the end of the lease and the lease is a closed end lease so the residual is guaranteed.
I think it's a pretty good idea. What do you guys think? Are my getting anything wrong?
(Oh, I should also say I can't write off any portion of the lease or interest payments as a business expense so that doesn't figure in.)
Also one more thing, I guess the first most obvious question is could I make $7,000 profit if I instead invested that $21,000 somewhere else. Let's assume not. I'm not that skilled an investor and it just won't happen. So we can leave that out of the equation.
Thanks in advance! And please keep your replies simple I dropped math in grade 10!
Last edited by hawc; 01-30-2009 at 08:34 PM.
Pay off the lease. no brainer. Dont forget, this is 7000 after tax.
Last edited by JimSouCal; 01-30-2009 at 10:34 PM.
Am I missing something here? You still owe nearly $22,000 after paying on the lease for 2 years. If I had to guess you have already paid nearly that much over the 1st two years. At the end of the lease you will have no car to show for it. Now you are worried about $7,000 in interest payments? How about this for an idea. Buy your next car. Pay it off as fast as you can to minimize interest expenses. Then keep it for a really long time, during which you will have no car payment and no interest payments. Its just a thought.
How much are you paying (P+I) per month? How did you come up with $7,000 interest?
Unlike a loan, lease cannot be just paid off early without Porsche's consent. You will save some interest, but not $7,000. Give them a call and let us know. The so call 6.95% is not exactly what it looks like. Leasing is like renting the same car every month for 4 yrs; they average out the payments since renting a new car on the 1st month should cost much more than renting a 4 yr old on the 48th month.
Also, I believe if you were to (god forbid) total your car tomorrow or it is stolen, your insurance would pay the depreciated value of the car. If that is less than what is owed, most leases have some form of "gap insurance" to cover that delta, so you simply walk away and get a new lease.
If you prepay the lease now and it is somehow destroyed or lost, I don't think the insurance co will reimburse you for that $21k. For that reason it often makes no sense to put any down payment on a leased car at all, rather roll as much as you can into the monthly payments, assuming interest rates are reasonable.
2007 CS Atlas/Gray (his)
Mods: Clear corners, short shift kit, RemoteKey, Borla catback exhaust, Black OZ Alleggeritas, Softronic SRP
Also in driveway: 2010 BMW 328i xDrive (hers), 2006 Odyssey EXL-RN (ours)
Look at the interest like this. You pay principal and interest the same as a loan to pay off the depreciation. Then you have to pay interest on the residual value of the car because porsche gave you the use of their money(car) for the term of the lease. If you pay off the lease now, you will still have to pay 24 months of interest on the residual value.You have Porsche's money(car) and they want interest on that money.
If you leased a $60,000 car for 48 months at 6.95% and the residual was $30,000 you would pay off the $30,000 depreciation as principal and interest just like a loan or $717.69 per month. The $30,000 residual that you are not paying off would earn $9,250 in interest for Porsche in 48 months, or about $192/month.
One-pay leases are popular in the luxury car market because of the interest savings... though I think in the future you will know not to lease a car for 4 years.... leases should be kept as short as possible... around 24, maybe 36 months at the most.
My question is what's our lease buy-out? The amount you have to pay to to purchase the car at this moment. Also is there another car you want? With the large rebates out there in the current market and low interest rates, you could effectively soften the hit of trading the car in early towards another.
Finally, I agree with Basch's point on the Gap insurance, you'd lose that, but I think 7-grand is worth taking a chance for that you won't total the car... not to jinx you, but what are the chances....
Thanks for all the responses so far.
I should just clarify one important point. I was trying to simplify things by saying I have a 'lease'. What I actually have is half way between a loan and a lease. It's something my bank offers called a 'BuyBack' which is essentially a loan but not for the full amount. I finance most of the car but at the end of 48 months I have the option of trading the car in for a guaranteed residual amount (in this case $34,000) and walking away, or refinancing the remaining amount (which would be crazy because it would be like buying out a car at the end of the lease.)
Because it's essentially a bank loan and not a lease to Porsche I do have the option of paying it off as quickly as I want - right down to the final $34,000 trade in value that's guaranteed 2 years from now.
What I do need to check on however is that I wouldn't still be paying any interest on the guaranteed residual value as Froggy points out.
And yes, I think in future I will do shorter leases. I still don't think I'll ever be in a financial position to buy the kind of car I want outright, which is why I (and I suspect many people) lease.
Last edited by hawc; 01-31-2009 at 10:38 AM.
I've never leased a car (nor ever even considered it) so I know I'm speaking out of school here, but paying interest on a lease? We don't pay interest to rent or lease an apartment or a house. Why should we on a car? I don't pay interest when I rent a car. I rent a car for a day, week, or even a month (once) and I pay the fee and when I'm done, the car rental company justifies the depreciation by the profit they made.
I just don't understand how anyone can charge interest on a lease? Is car leasing actually more of a rent-to-own deal?
Leasing just seems like such a scam to me. I don't like contracts and I don't like being told what I can and can't do with something I supposedly own. Every time I buy a new car, the dealerships always tell me how much better it would be if I were to lease the car instead of pay cash and they give me all sorts of reasons why; never heard one reason that made any sense to me. Now that I know they charge interest on top of all of this is just another reason for me not to even consider a lease. I also figure that the dealers push leases (and loans) so hard becuase they are going to make more money out of the deal and NOT becuase they are just trying to be nice or to help me out.
Leasing never made sense to me and I doubt it ever will.
Lots of good advice given already. I usually buy my cars outright with cash, but financed my previous car using one of these bank leases, putting nothing down and financing over five years. The draw was that you could count off the interest on your yearly taxes, but in the end it was not worth it and I would not do it again. At the end of the term, I could buy the car for the residual value or turn it in. I turned mine in and bought my Cayman. The residual on the car was $35,000, but the value was only $25,000. The bank offered the car to me for $25,000. If the car had been only 2 or 3 years old, I might have considered taking them up on their offer.
Paying off your balance is a guaranteed 6.95 percent return. If you can do better than that, put your money somewhere else.
If you want to drive a new car, the difference between financing options is insignificant. Leases are often derided by the ignorant. If you paid cash for your Cayman, you traded interest for depreciation. You can look down your nose at a lease, but there at the tip you will see a car that is worth half of what you paid.
If you can keep your head when all about you are losing theirs, maybe you just don't understand the situation.
When you lease, sales tax is calculated on each monthly lease payment. If you replace your car every 3 yrs, as many do, (assume resisdiual at 3 yrs is 50%... it's usually higher) then you saved 50% or more of the sales tax by leasing v buying.
DaveN007 is spot on...Leases are often derided by the ignorant...people need to learn more about them.
That sir is why I always pay cash for Tax+title+reg when I buy a car. Then you never pay interest on those items. Does it have an effect on the amount I put down for the car, typically, no, because it is an assumed expense when I walk in to the deal to make the purchase.
2008 Cayman S
2007 Cayman (Retired)