# One pay versus standard lease



## 5er (Jun 28, 2007)

I realize there has been nearly overwhelming consensus on this board not to put a down payment during a lease because of a potential disaster should the car get totalled. I wanted to run the numbers to actually see what (i.e.$$$) was at risk by doing this:

If I do a no money down lease (using the lease calculator on this forum), for the car I want (which I will be getting via European Delivery):

Over the lifetime of the lease (3yr/36K miles), I'll be paying out:
$28013.53 of which $16430.30 is the amount financed/capital (depreciation) and $11583.23 is interest (due to the current lousy MF on 335 convertibles) and other inception costs (acuqisition fee, title). In addition, to even get this amount of interest, I would be taking advantage of the MSD program and paying out an additional $6400 (8x$800) at signing in MSD's.

Now let's take the one-pay scenario, where essentially I make all my payments at signing. My pay out then is:

$23287 of which 16430.30 is still capital and now $6856.70 is interest (or an interest savings of $4726.53). Also, since there is no further monthly payment, I am assuming the cost of each MSD will be $50 (or only a total of $400 at signing) --- if that is not true, then their is a hole in my analysis.

If the car is totalled, and the insurance will only pay out the wholesale price, it seems to me that what I am really putting at risk by going this route is the $6856.70 of interest ("interest at risk" if you will)

Also, since I will be going the European delivery route, let's say I will be getting the car for around $1800 less than USA invoice price..... I think it is reasonable to assume that this $1800 can offset some of the pre-paid interest that would be forfeited if he car was totalled, so the total amount I would lose if the car was totalled is $5000.

So in the final analysis, in taking the pre-paid/one pay lease option, I would save $4200 dollars in interest (100% chance) in exchange for the small risk (I think the chance of the car being totalled is small, I hope) of losing $5000. Of course, I do have to layout more capital at the beginning (because the MSD's with the one pay will be much less, the actual difference in initial signing costs is around $16K) --- whether I can make $4200 over a three year period by investing that $16K is not clear (26% growth in 3 years), but not likely.

For those of you patient enough to read through this, I thank you. 

I'd appreciate comments from the forum members (and dealers) on whether this analysis and thought process is correct. Unfortunately, after all this, I am still not sure what the right decision is.


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## philippek (Jul 31, 2003)

IMO, pre-paid BMWFS leases make a lot of sense for vehicles with non-subvented lease rates, like the 335 convertible in your example, and exactly for the reasons you outlined.

For vehicles with subvented rates, pre-paid leases are a very unwise move. It would be better to just lease it as usual, then make all the remaining payments on month 2, if you're dead set on pre-paying.


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## BayAreaBMWFan (Aug 8, 2004)

Can you MSD with one pay? So the discount can potentially be 0.0008 for one pay and 0.00049 for the 7 MSDs?

Also, how does gap insurance work in the case of pre-pay leases from the customer's point of view? Will it be enough to make the customer whole again? i.e. if a car is totalled can the customer walk out with a new car at pretty much the same terms (assuming the interest rates/residuals are the same).

The OP is talking about losing the interest component of the pre-pay lease; I am not sure I understand that well. Also if you exercise the right to buy a car you have pre-paid, do you pay the residual or do you also get some credit for the interest paid up front?


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## philippek (Jul 31, 2003)

BayAreaBMWFan said:


> Can you MSD with one pay? So the discount can potentially be 0.0008 for one pay and 0.00049 for the 7 MSDs?


 Yes.



BayAreaBMWFan said:


> Also, how does gap insurance work in the case of pre-pay leases from the customer's point of view? Will it be enough to make the customer whole again? i.e. if a car is totalled can the customer walk out with a new car at pretty much the same terms (assuming the interest rates/residuals are the same).


Likely, but not 100% assured. Therein lies the rub.


BayAreaBMWFan said:


> The OP is talking about losing the interest component of the pre-pay lease; I am not sure I understand that well.


Sure you do. It's what you've calculated as rent thousands of times in other lease structures.


BayAreaBMWFan said:


> Also if you exercise the right to buy a car you have pre-paid, do you pay the residual or do you also get some credit for the interest paid up front?


There is no credit for the interest vis-a-vis the residual whether it's paid up front or over time.


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## TropicsX5 (Jan 14, 2007)

Recently did prepaid lease from BMWFS. MSRP 53325 Cap Cost $50K. Prepaid $30K include tax 36 months. 0% MF . Payoff aporx $20K plus tax during lease term. Residual 70% if buy after lease end. Save aprox close to $7K rental fee if payoff during lease term.


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## AMP (May 1, 2002)

BayAreaBMWFan said:


> Also, how does gap insurance work in the case of pre-pay leases from the customer's point of view? Will it be enough to make the customer whole again? i.e. if a car is totalled can the customer walk out with a new car at pretty much the same terms (assuming the interest rates/residuals are the same).


I did a one pay several years ago. If memory serves my statement each month showed my "monthly payment" deducted from my account. In other words, it looked like BMWFS took the one pay, put the money "on account," and then deducted an amount each month.

I never got to test it out, but my assumption was that if the car had been totaled the remaining money "on account" would be returned to me.

It's just like any lease contract. You agree to pay $XXXX and BMWFS agrees to give you the use of a car for a fixed period of time. If that time is cut short in a standard lease the contract terminates and you don't have to pay anymore. In a one pay the end result should be the same. In other words, unused payments should be returned to you, not kept by BMW. If they are keeping your payments then, technically, they are required to provide you with a car.


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## 5er (Jun 28, 2007)

Thanks for the great feeback .... but there are a couple of comments that I am not sure I am understanding

1. Is my MSD assumption incorrect? By prepaying the whole amount, I thought my monthly payment is $0, and hence the Security Deposit amount becomes $50 .... so for 8 MSD's that's $400. Based on what AMP is saying about a virtual "monthly payment", it seems that it is possible that that "virtual amount" could possibly be used for the Security Deposit calculation .... which one is it?

2. I don't understand how gap insurance is a factor here. Unless I am mistaken gap insurance is included (at no additional cost) in BMWFS leases. If we are paying a significant downpayment as in a one-pay lease, then I would presume gap insurance would never kick in if the car was totalled --- I thought that was the principal fear in putting money down in the lease. However, I thought the fact that via ED the price paid was less than US wholesale price meant that it was highly unlikely that one would get inverted, thus obviating the problem of the gap insurance not kicking in.

3. I had always assumed that if the car was totalled, the pre-paid interest would be lost ... however, according to AMP, if there is a virtual monthly payment being deducted, then presumably it the car was totalled and the lease was thus terminated, then the residual interest should be returned to the customer. If this is true, I think this makes the prospect of a one-pay lease even more palatable.

4. Finally, does anyone who how the BMWFS paid 2nd payment on an ED lease factors into this?


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## TropicsX5 (Jan 14, 2007)

AMP said:


> I did a one pay several years ago. If memory serves my statement each month showed my "monthly payment" deducted from my account. In other words, it looked like BMWFS took the one pay, put the money "on account," and then deducted an amount each month.
> 
> I never got to test it out, but my assumption was that if the car had been totaled the remaining money "on account" would be returned to me.
> 
> It's just like any lease contract. You agree to pay $XXXX and BMWFS agrees to give you the use of a car for a fixed period of time. If that time is cut short in a standard lease the contract terminates and you don't have to pay anymore. In a one pay the end result should be the same. In other words, unused payments should be returned to you, not kept by BMW. If they are keeping your payments then, technically, they are required to provide you with a car.


Exactly looking at my 1st statement

Previus Balance 0
payment received 30,809.52

Lease Payment Due 803.59
Sales USe Tax 52.23

Credit/Balance: No Payment -29,953.7


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## mclaren (Jan 5, 2005)

With my Z4 and the very low money factor I did a standard lease and put enough money to make all the payments in a 5% savings account then signed up for easy pay. This way I am just like a pre-paid lease. I can't stand making car payments. Also, my son only does pre-paid leases on his Lexus ( what is the plural of Lexus ? ) and he says their in no risk if the car is totaled, and he has checked, and he is a CPA. He says they payoff the residual and prorate what you paid.


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## philippek (Jul 31, 2003)

5er said:


> Thanks for the great feeback .... but there are a couple of comments that I am not sure I am understanding
> 
> 1. Is my MSD assumption incorrect? By prepaying the whole amount, I thought my monthly payment is $0, and hence the Security Deposit amount becomes $50 .... so for 8 MSD's that's $400. Based on what AMP is saying about a virtual "monthly payment", it seems that it is possible that that "virtual amount" could possibly be used for the Security Deposit calculation .... which one is it?


You will still have a "monthly payment," equal to your total pay-out divided by 36 (or whatever lease term you choose). Add tax to that, round up to the nearest $50 increment, and that is your security deposit amount.


5er said:


> 4. Finally, does anyone who how the BMWFS paid 2nd payment on an ED lease factors into this?


As above, divide your total pay-out by the lease term, and that amount is deducted from your one-pay.


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## adgrant (Aug 13, 2003)

AMP said:


> I did a one pay several years ago. If memory serves my statement each month showed my "monthly payment" deducted from my account. In other words, it looked like BMWFS took the one pay, put the money "on account," and then deducted an amount each month.


You are correct. I did a one pay a few years ago and saw the same thing.


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## 5er (Jun 28, 2007)

Our CA just told me that with the pre-paid/one pay --- you do not recoup your money if you get out of the lease before the end of term ... that would stink ..... can any dealers or forum members who have gotten out of pre-paid lease respond as to whether that is there understanding as well.

Thanks.


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## Robert A (May 18, 2003)

Why would you prepay a lease when the MF is zero? They're giving you their money for free. Why not just keep it yourself and invest it in a money market account earning 4.5%



TropicsX5 said:


> Recently did prepaid lease from BMWFS. MSRP 53325 Cap Cost $50K. Prepaid $30K include tax 36 months. 0% MF . Payoff aporx $20K plus tax during lease term. Residual 70% if buy after lease end. Save aprox close to $7K rental fee if payoff during lease term.


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## adrian's bmw (Feb 14, 2003)

5er said:


> Our CA just told me that with the pre-paid/one pay --- you do not recoup your money if you get out of the lease before the end of term ... that would stink ..... can any dealers or forum members who have gotten out of pre-paid lease respond as to whether that is there understanding as well.
> 
> Thanks.


That's correct.

I currently have a client who has a pre-paid lease on his M3 through Feb. He can turn in today, but would not receive credit for two payments. He's already miled up, so technically it doesn't matter. I mean, you can go to term or mileage on a pre-pay and you ultimately paid for that period/mileage of depreciation.


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## TropicsX5 (Jan 14, 2007)

Robert A said:


> Why would you prepay a lease when the MF is zero? They're giving you their money for free. Why not just keep it yourself and invest it in a money market account earning 4.5%


That's th point MF on X5's were .00275 x2400 = 6.6% by prepaying deal was 0% MF

36 Month ***8211; Residual 58% of MSRP ***8211; .00275 Base Rate


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## AMP (May 1, 2002)

adrian's bmw said:


> That's correct.
> 
> I currently have a client who has a pre-paid lease on his M3 through Feb. He can turn in today, but would not receive credit for two payments. He's already miled up, so technically it doesn't matter. I mean, you can go to term or mileage on a pre-pay and you ultimately paid for that period/mileage of depreciation.


If, however, his car was declared a total loss today he would get the remaining two payments back as his insurance co + GAP would cut a check equivalent to today's buyout price. The remaining money on the account would be returned.

Again, a pre-pay is the same as a regular lease. If you terminate the contract early through *buyout *then you don't make the remaining payments.


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## erictheman9 (Jun 28, 2007)

5er,

As hinted at by others here, one factor I'd consider in your calculations is "net interest." With the prepay lease, you're puting a huge amount of money up front and earn no interest from it. With the normal lease, you'd be earning interest (at least for a bit) on money that you hadn't yet spent toward the lease. I'm not sure if this would change your analysis much, but it would likely reduce the difference in interest costs between the prepay and a normal lease a little (maybe 1-2k at least?)


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## BayAreaBMWFan (Aug 8, 2004)

And the fact that the discount for prepayment is calculated from the base rate of 0.00305 (7.2%)! So it makes sense only for cars which do not have any subsidy (like the M or the E93s)


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## microauv (Dec 5, 2010)

There are other factors to consider other than the simple question of the interest savings of traditional lease vs one pay.

Cash flow, the income of the purchaser, alternatives being considered, etc.

I recently talked a friend into trading a paid off junk car which was worth about $7000 and costing him $1500 a year in maintenance into trading the car equity for a 30 month prepaid Honda Civic lease. His maintenance went to zero, gas expense went down, depreciation became stabilized and paid for, and reliability and safety improved. Subsequently he lost his job for nine months and was happy with his ability to drive with virtually zero outlay during that time.

And more recently, I did a one pay lease on a Mini Cooper for 36 months for my wife. She was starting a business and needed a small car to use. From my perspective, I provided her the benefit of a new paid car and the cash outlay of less than half. 

I believe that more buyers consider a one pay lease as an alternative to an outright cash purchase than to lease payments.

I also think that the one pay lease is the best kept secret on how to pay for a car.


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## Robert A (May 18, 2003)

With BMW (as with any single-pay lease), the discount rate should be the same as the effective rate (the money factor) in a non-single-pay lease. For example, if the money factor on a regular lease yields an interest cost of 5%, the discount factor (the present value) of a single-pay should also be 5%.


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