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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 About the author: 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.

{ 30 comments… add one }
  • DavidV September 28, 2009, 9:54 am

    I was out with an accountant for lunch a few weeks ago and he told me that he leases for the tax reasons, but instead of a monthly payment he pays the entire lease at one time, thereby moving his tax advantage up and leaving it so he doesn’t have to pay every month.

    This leads me to think the accountant is charging me too much, but that’s a different story! But, something to consider if people have the means.

    • bob January 16, 2016, 9:15 am

      If you pay the lease up front and you have a total loss, I think that would work and makes sense, but if you use a trade in value to effectively lower your lease payments and save the tax corresponding to that value on the total lease obligation, its another story completely from what i understand. I believe that you will lose the benefit of your trade in if your car is totalled, unless you pay the extra replacement value on your car insurance (which is apparently not needed, as the dealership insures your new car with gap insurance, i.e. if car is totalled, it covers the remaining lease obligation. In Quebec, there is a workaround. Instead of applying a trade in value to the lease, they can give you a cheque for the amount, and you still are able to reduce the tax on the lease by the rate on that amount. It is called a lien payment (not actually a lien at all, just antiquated leasing terminology the govt uses i am told). So this way you could walk away with a cheque, and still apply that tax of that amount you would have saved on the new lease. Your lease payments will no longer be reduced of course by the trade in value.

      With replacement value (costs me an additional 220 a year) car insurance, the dealer gap insurance pays for your remaining lease if there is a write-off, plus your insurance company pays you what you have paid in lease payments (so far i believe). So over 4 years, if i don’t get the replacement value insurance option, i save 1000 on car insurance, bu i don’t get paid out so to speak if the car is totaled, i don’t get paid a 4800 x N years (if lease is 400 a month for example).

  • Michael - The Fat Loss Authority September 28, 2009, 10:39 am

    Nice tip.
    I’ve been looking at the RAV4 as my next vehicle so this is quite timely but I’m confident I’ll be able to do better through my bank on the interest rate.

    Mike

  • Money Bags September 28, 2009, 11:54 am

    As an aside, I’d recommend against purchasing from Toyota in St. John’s. Their after-sale customer service is terrible. At least, that’s been my experience.

  • noob September 28, 2009, 12:06 pm

    You mention that the lease payments can be written off as a business expense in its entirety (as against percent of use for business purposes) representing depreciation of the vehicle. According to my acountant only the percent of the monthly lease payment (which corresponds to the percent of the vehicles use for business purposes) may be written off.
    Would this make a difference if the business was a proprietorship or a corporation?
    Some interesting questions. I guess I will have to revist this topic with my accountant.
    Anyone out there whose corporation is leasing a vehicle and is writing off the entire lease payment as an expense (representing the depreciation of the vehicle)?

  • DAvid September 28, 2009, 12:29 pm

    Money Bags,
    Your experience conflicts with that of my parents regarding the dealer’s service response. So I guess as with many issues YMMV.

    DAvid

  • FT FrugalTrader September 28, 2009, 12:31 pm

    noob, that is an interesting question. I know that with a sole prop, only a percentage can be written off. However, if the car is purchased under a corp (on title), I assume that the car lease payment can be written off entirely providing that the car is used for business.

  • noob September 28, 2009, 1:07 pm

    FrugalTrader, my understanding is that this works for vehicles left at the office site with employees driving personal vehicles to the office site. Also there would have to be proper log book entries showing mileage and purpose of use for the leased vehicle.

    In my case it is a small corporation with the office location being my home. CRA would not be happy if I were to claim 100% of the lease payment as an expense. My accountant believes the best for a person in my situation is to claim the mileage on vehicle as a business expense at the CRA prescribed rates.

    Still open to any alternative legal measures to save some more tax through this vehicle (no pun intended)

  • FT FrugalTrader September 28, 2009, 1:11 pm

    Noob, thanks for the clarification. Yes, if the car is used heavily for personal mixed with business, then it may be your best bet to claim the mileage.

  • Craig September 28, 2009, 2:59 pm

    The only reason I would say to decrease the security deposit is because if you leave a high deposit, then get into an accident that totals the car, you lose out on that deposit.

  • Kathryn September 28, 2009, 3:52 pm

    Craig: That’s what I was thinking. Am I missing something?

  • FT FrugalTrader September 28, 2009, 3:58 pm

    Craig, good point never thought of that. If the driver does get into an accident though and repairs the car to an acceptable condition, are they eligible to get their security deposit then?

  • The Rat September 28, 2009, 6:28 pm

    My spouse and I entered into a lease arrangement at GM for a small Optra car, just for farting around and getting to and from work. Personally, I feel it makes sense if you can minimize your cash outflow stream and if you expect to have low mileage. That way, if both heads of the household are working full-time and time is limited, you have bumper to bumper coverage for most of the duration of the lease.

    From what I can gather, some dealerships don’t even offer lease arrangements anymore so some of these opportunities are dying out. Personally, I would not want to enter a lease arrangement with a big ticket item, such as a heavy duty pick-up truck where you have payments of over $600/month. Our Chevy Optra runs us $279 bones a month and we have less than 10,000km clocked in 3 years. That way, when the four year lease is up this upcoming summer, we can opt to buy it out fully and then resell it at a better price, or simply keep it given the shape its in. I also find that if you’re buying a lemon, you will find out in the first year or so what you bought.

    Depending on one’s location, time estimated for use of the vehicle, monthly amount to be paid, and time constraints in general, a lease arrangement may be advantageous. Otherwise, simply buying it out could be an option. Derek Foster offers a loan option whereby one can borrow funds to buy a vehicle and the dividends accumulated pay for the expenses. I guess its a real possibility, but that avenue may not always be realistic or comfortable for some.

    Cheers.

  • Ms Save Money September 28, 2009, 8:13 pm

    Interesting – I’ve never leased a car before because I’d just rather have my own car. But this is a good tip for anyone who likes to drive new cars every few years or just for those who are travelers and don’t stick around too long in one area.

  • chuck September 29, 2009, 1:03 am

    The other option you can undertake is to pay yourself a tax-free mileage allowance instead of writing off the lease. Provided that the rate is based on kms travelled for business purposes and <= the proscribed rate by the CRA then its tax-free in the hands of the recipient.

    I walked into my local Toyota and Subaru dealers today and both of them were trying to talk me into a no down payment, no cash at signing lease. The nothing down portion scares me for some unknown reason, beyond just higher monthly payments

  • Canada Deals September 29, 2009, 1:58 am

    Both my husband and I drive leased vehicles and we wouldn’t do it any other way.

  • John DeFlumeri Jr September 29, 2009, 3:33 am

    thanks, I’ll try that one nxt month when I get the new car!

  • Elmo September 29, 2009, 9:49 am

    I leased a car for the first time 2 years ago. I do take very good care of my vehicles, but thanks to others in parking lots there are scratches and dings all over the place,plus the car is black which makes the scratches look even worse. I know that when I take it back I”m either going to have to pay up, or buy the car out and fix it up to resell or keep.

    I don’t think I’ll lease again.

  • carmen September 29, 2009, 11:40 am

    i thought this post was very helpful. my first car is leased and it’s the only way i think i will go.

  • used tires September 30, 2009, 3:02 am

    I’ve never been a big fan of Leasing a car… but is it possible for a normal consumer to be able to benefit from taxes from leasing a car as well? Because I’ve heard that it might also be a tax advantage to not only as a business owner as you mention, but also as an individual, is this true?

    Till then,

    Jean

  • cannon_fodder September 30, 2009, 11:30 am

    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.

  • Amanda October 1, 2009, 11:35 am

    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!

  • Briefcases October 2, 2009, 8:39 pm

    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.

  • food November 24, 2009, 2:29 am

    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.

  • M November 27, 2009, 5:51 pm

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

  • JK November 27, 2009, 7:32 pm

    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.

  • MStar December 7, 2009, 3:51 pm

    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.

  • BGone January 3, 2010, 8:44 pm

    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?

  • Bruce February 16, 2011, 10:08 pm

    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.

  • Bill August 5, 2012, 3:36 pm

    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.

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