Leasing Benefits for the Cash Buyer

July 9, 2018

You are conservative and don’t like debt when it comes to vehicles. You’ve always been of the mindset,

“If I can pay cash for a vehicle, why would I lease?”

You don’t want the hassle of making monthly payments, so you pay cash.

You are a perfect candidate for leasing.

Perks of Single-Pay Lease

Keep approximately 50% of the vehicle cost in cash and save on sales tax.

Most leasing companies offer a “one-pay” or “single-pay” lease. In a single-pay lease, the lessee makes one lump sum payment as opposed to monthly payments spread over the length of the lease. Because the payment is made up front, the total monthly payments are reduced for an interest credit. Single-pay leasing offers cash-buyers a cost-effective and convenient vehicle acquisition strategy while granting them the benefits of leasing. The primary benefit of this approach for the cash buyer is

the cash buyer only pays for what they use, not the entire vehicle.

For example, you could pay $70,000 cash for a vehicle and own it or you could pay the single pay lease payment of $40,000 and lease it for 36 months. Whether you buy or lease, the vehicle will lose the same value. The single pay leasing option simply allows you to retain capital and invest it. Invest the $30,000 excess cash elsewhere. The $30,000 is called residual value or the estimated value of the vehicle at the end of the lease.

There are two types of leases: open-end leases and closed-end leases. Open-end leases will most closely match the risk profile of a cash buyer. They do not have mileage or damage charges and are naturally flexible. The lessee is responsible for the vehicle’s value at the end of the lease. This residual value is estimated at the beginning of the lease and takes anticipated mileage and wear and tear over the term of the lease into account when setting the residual value. If the value at the end of the lease is higher than the estimate, the equity built up is paid out to the lessee or used as a trade-in value on a subsequent lease. If the value is less than the estimate, the lessee is billed for the difference. This typically occurs in cases of unexpectedly high mileage or damage. No punitive mileage or damage charges result.

In the above example, under an open-end lease, the estimated value at the end of the 36 months was $30,000. If the vehicle were worth $32,000, the lessee would receive a $2,000 refund, the built up equity in the vehicle. Their total cost of use was $38,000. Likewise, if the vehicle were worth $29,000, the lessee would pay an additional $1,000 at lease termination. Their total cost of use was $41,000.

Under a closed-end lease, the lessee pays a fixed cost. These are typically consumer leases and more restrictive. There is a mileage limit and excess mileage charges and excess wear and tear on the vehicles are billed and can be significant, particularly in fleet use.

In both the open-end and closed-end lease, you have a choice at the end of your single-pay lease. You have the flexibility to buy the vehicle, extend the lease, or turn the vehicle in. Most single-pay leases are set up as open-end leases.

Tax Benefits

Lessees also save on sales taxes in most states. When you purchase a vehicle, you pay sales tax on the full purchase price and the tax is paid up front. When leasing, sales tax is only paid on the single lease payment. In the example above, tax is only paid on the $40,000 not the $70,000. If your sales tax rate is 6% that is a $1,800 savings.

Total Savings Potential

If you invest the $30,000 residual value from the example above in an investment earning an annual 6% return, you would earn $5,730 over the 36-month lease. Add that to the tax savings of $1,800 and the total savings is $7,530!

Nothing to Lose

Single pay leasing is a great alternative for the cash buyer. As you see, when comparing a cash purchase to leasing, you lose nothing under an open-end single-pay lease. In fact, you GAIN. At the end of the 36 months you are in the same equity position in the vehicle if you would have purchased it… PLUS you had the $30,000 invested in other growth opportunities NOT a depreciating asset. Additionally, through leasing you’ve saved $1,800 in sales tax.

Consider the open-end, single-payment lease for the savings and ultimate flexibility