QuestionQUESTION: Roger,
I own a 2007 Honda Civic EX that is in excellent shape with 47k miles on it. We currently owe $16,500 (due to rolling negative equity into the loan when we bought it new). Would it be sensible to trade this vehicle in to lease something like a Toyota Rav? Our payments for the Civic are $456/month. If we would prefer a lease payment to be much less than that, what should I do?
Thanks in advance for the help,
Ryan
ANSWER: Hi Ryan,
My first thought was "oh so you're the guy with negative equity?" lol seriously you are in good company along with most of America. First off assuming I booked your car exactly right (4dr EX Automatic) then you are still carrying some negative equity of about 5k. If all you are after is a cheaper car payment then what i would do is refinance the car you are in. $16,500 at 60 mos would drop your payment about 120.00/month. (depending upon APR)
Leasing will generally give you a lower payment than a purchase (a 39-42 month lease is generally around the same as an 84 month purchase payment) HOWEVER, when you roll negative equity into a lease it has a multiplied effect on the payment the same way that money down would have in a good way.
Here is why...
when a lease payment is calculated it is based upon the interest (money factor) you would pay on the entire amount of the unpaid price of the car PLUS the amount of the depreciation the leasing bank estimates will occur during the olease term based upon the number of miles you expect to drive the vehicle (think of approx 50% of the price).
When you purchase a car the payment is based upon the amount of interest you will pay on the full amount plus paying back the entire purchase price (principle).
so on a 2011 RAV 4 with an MSRP of $24,883.00 and a 50% residual and a money factor (expressed as a decimal but equal to assuming 7%) and taking the 750.00 rebate you would pay back approximately 15,766.00 (12,400 depreciation and the rest in interest) your approxinate payment with no trade would be 427.00 for 36 month lease. If you add on the approx 5k in negative equity your payment goes to 566.41 ...see what I mean ...you are paying the negative off at an faster rate than under traditional purchase type financing ...the 5k gets amortized away in 36 months vs 60 or 72 ...
What should you do to get the lowest possible lease payment? Money down....just like you saw the payment go way up when we added the 5k in negative equity ...if you put 5k down it would go in the opposite direction accordingly.
DISCLAIMER: these figures are for example only an used a money factor of .0028 which is really low and since I haven't seen what money factor you would qualify for.
My private e-mail is roadloans@Gmail.com if you have any follow-up questions feel free to ask them and going direct to this e-mail will get a much faster response as it gets sent directly to my phone and I check it constantly throughout the day. Good luck.
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I hope this helps
Roger
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QUESTION: Roger,
I understand how the payment could be larger because you end up paying off the neg. equity faster....but how is it that I see lease offers for, say, $250/mo for a 2011 Accord? How could they do that when your calculation for the Rav (at $24k) ended with payment of $427/mo? By the way, we have excellent credit.
thanks,
Ryan
ANSWER: Here is how it's done:
For starters I was just using that as an example to demonstrate the dynamics of meg equity in a lease ...the money factor, residual value etc were all pulled out of thin air. Additionally the MSRP I used was a real one but I didn't discount the price even 1.00 for you when I banged that out so if the vehicle had a more likely residual value of say 56% and you ground me down 2,000 on the price and with no negative equity and by extending a 36 month lease over 39 months which Toyota financial will let you do and then by putting you into an ultra low mile lease (or at least advertising based upon a super low mileage lease) I would get to add back 2 more points to the residual value ... and shazaam you have a much cheaper payment. When we run a lease ad it generally applies to 2-5 cars that have been in my inventory so long that the bank is ready to charge me curtailments on them and what we will do is strip the price down to a zero deal and use the lowest money factor imaginable from one of our banks and then chop the miles down to 8000 a year. Cars with big rebates (Ford Chevy) also help sometimes
---------- FOLLOW-UP ----------
QUESTION: Roger,
Sorry for the follow-ups, I can't help it. It's great to acquire info from those that are experts! So for several reasons, my wife and I would prefer to lease. Given our situation, how can we coordinate a deal where we decrease are payment even a little bit? Also, if you were in my shoes and had the same intentions, what offers/deals would you pursue (and from which manufacturers)?
Answer
car guy
I am assuming that you don't have a big chunk of money to put down. What you need to remember is that 100.00 per month (roughly but within a few bucks only) of your monthly payment every month on whatever car you choose is going to go towards paying the negative equity you are rolling = forward. You can get the payment down by going into a 60 month lease ( w/ 3 extra months 63 months even) and amortize it away over a longer period of time. stick with a brand with good factory supported residuals if you can go w/ a term of 48 months or less (because the factory supported residuals come thru the captive lenders who only want to do the shorter term leases) if you can find a model you like with a huge rebate (like 4000 would be nice) then i would go that route also make sure you know what the invoice price of the vehicle you are trying to buy is before you try and buy it ... the wild card which leaves you vulnerable is your trade in and the fact that you are so payment conscious (we like that). There is a free program at www.questez.com that will let you crank out lease payments on any vehicle you want to plug in download just the F and I program and after you install it on the top it will say "to lease screen' which is how you will switch from purchase to lease ...use the cars highest price before any discounts from it's window sticker as the MSRP, the 'cap cost' is the price you will pay for the car (figure 1500 below msrp) plug in your trade value and payoff (value is approximately 5k less than payoff) and plug in the term ...use a money factor for great credit of .0024 and you are on your way ... don't forget garbage in - garbage out...
what would i do to accomplish your task...hmmm I would find a credit union asap (for rates under 4% right now in oregon) they will also loan you stupid money on ridiculous LTV ratios and I would refinance the car you are in OR I would find a late model pre owned RAV 4 or CRV or Ford Escape and finance the negative along with that car for 84 months at 3.99% which would be the same exact payment almost as a lease only you will be buying something versus renting it. If you have 3-4 k laying around gathering dust then I would sell your civic on craigs list yourself (retail your way out of it will save you 2k minimum.) pay off the loan then go lease a car with no trade and no way to get beat m :)
