Even as an excellent money-saving tool, multiple security deposit leases still may not be for everyone. This article can help you decide if an MSD will be the best choice for you.
What is a Multiple Security Deposit Lease?
Many individuals who are going to be getting into a lease never hear about multiple security deposits.
In general, it is a largely unknown strategy.
A multiple security deposit lease allows you to make up to 10 deposits typically equal to one month’s payment on a lease rounded up to $50 upfront when first purchasing a car. However, unlike a down payment, you will receive the security deposit back when you return the car.
For example, if your monthly payment is $582, the nearest $50 would be $600. You can then make up to 7 $600 payments to reduce your money factor.
To understand fully what a multiple security deposit lease is, you first need to understand the money factor and leases overall.
Suggested reading: An Ultimate Guide to the Money Factor
A lease, contrary to a loan, allows you to use a vehicle, normally brand new, for a set amount of time and miles while paying a set amount each month. You make monthly payments but have no ownership of the vehicle once the term of your lease is up. Normally, once those leases expire, the individual decides to choose a different vehicle and get a new lease. Leasing a car is just like a long-term rental.
Traditionally, leases involve an upfront payment, they have a length of two to four years, they have fees at the end of the lease, and they use a money factor. Your dealership will determine how many miles you’ll be able to drive each year, how normal wear and tear is defined, and what happens if you miss a payment. You may also be subject to termination fees if the lease is cut short.
So, a multiple security deposit means that your dealership will accept multiple deposits at the beginning of your lease which will work to reduce your money factor.
The money factor is an extra charge to your normal monthly payment for financing. This amount is like the interest that would traditionally be paid on a loan; however, money factors are solely for vehicles. You can calculate your APR (annual percentage rate) by multiplying your money factor decimal by 2,400.
The money factor is another term for the interest you pay on a car payment. Instead of a percentage, however, this rate is represented by a decimal that can then be converted to APR. For example, a money factor of .0025 would convert to an APR of 6%.
Multiple security deposit leases can vary between who you decide to purchase your car from, so be sure to read the fine print and understand their unique terms.
Which Brands Allow Multiple Security Deposit Leases?
Only Toyota, Infiniti, BMW, Mercedes-Benz, and Lexus have a multiple security deposit program. Each of these automakers may have their own special requirements for their multiple security deposit lease programs so it is important to do your own research if you are contemplating purchasing from one of these automakers. Some may require a minimum of two security deposits in order to reduce your money factor.
What is the Purpose of a Multiple Security Deposit Lease?
The purpose of a multiple security deposit lease is to reduce the money factor on your car lease. Using a multiple security deposit lease reduces the amount you need to pay each month in interest thus reducing your overall cost. Since you are losing money and not eventually owning the car after a lease is up, it is worthwhile to try to reduce the monthly payments as much as possible. Plus, you’ll receive the money back at the end which can then be used for another lease if you would like.
For dealers, offering a multiple security deposit lease program could attract more customers as this can be a sought-after program.
Pros of a Multiple Security Deposit Lease
Unlike a down payment, the customer receives their security deposit back when they return the vehicle. In addition to getting the money back, the customer can also save hundreds to thousands of dollars on their lease over the time that they have it. This is a huge benefit. Not only do you receive the money back at the end, but you also get a large discount on your lease.
Because you get the money back at the end, participating in a multiple security deposit lease is just like an investment. A pretty lucrative one at that.
In addition to providing a lowered money factor on the lease for customers, a multiple security deposit lease also helps to protect the leasing company against damage to the vehicle or nonpayment on the lease.
Cons of a Multiple Security Deposit Lease
There are not a lot of cons when it comes to a multiple security deposit lease. Overall, this is a wonderful choice to reduce your personal cost. However, putting down a big security deposit could be tough for some. If you do not have a lot of money available when you are looking to purchase a car, a multiple security deposit lease may not be the best option for you.
Also, if your lease already has a very low money factor, spending extra money just to get it down a tad more might not be worth it.
It depends on where you are leasing your car from, but if you terminate your contract before the due date, you may lose your MSD. To ensure you will be receiving your MSD at the end of your term, be sure to check with your dealership.
Example Calculations of the Impact of a Multiple Security Deposit Lease
Toyota provides this estimate when it comes to how much money a multiple security deposit lease can really save you. “In respect to the flat rates provided for multiple security deposits, a 2014 Corolla LE CVT lease would cost $280 PER month for 60 months @ 2.9%. However, depositing 10 times the security deposit of approximately $3000 ($300 for Corolla x 10) would bring the interest rate down to 1.4% making the payments $260/month.”
Another calculation is provided on this forum by user Michael. “BMW’s current MF rate is .00131 (equivalent to 3.14% APR). Each security deposit lowers the MF by .00007. If one were to place 7 security deposits (the maximum allowed by BMW FS), then the MF would drop from .00131 to .00082 (1.97% APR).”
As you can see with both approximations, multiple security deposit leases can reduce your APR by almost half. This is why they are worth looking into for your new lease.
Feel free to use this calculator to give you a better idea of the impact of a multiple security deposit lease on your unique situation.
What Happens if I’m in an Accident with A Multiple Security Deposit Lease?
If your car is severely damaged and your insurance company declares that it is a total loss, your insurance will cover the current cost of the car. Essentially, your insurance will buy you out of the lease and end the contract. You will still receive your security deposit even if your car is totaled. You can then enter into a new contract with that money. MSD’s are fully refundable.
Most dealerships offer GAP insurance. This is an optional auto insurance coverage to cover any gaps or differences between the worth of the vehicle and how much your loan is worth. This GAP insurance comes into play when your car is totally wrecked or stolen.
MSDs are refunded after the contract is fulfilled. It can be fulfilled in any of the following ways:
- Vehicle is returned at the end of lease agreement
- Vehicle’s buy-out amount is paid
- Vehicle is totaled and insurance pays the bank (If value is < buyout, GAP pays the difference. If value is > buyout, leasee gets the remainder)
If you’re looking into ways to save money on your next lease, you likely discovered a dealer who offers a multiple security deposit lease. This option allows you to make multiple security deposits at the beginning of a lease to reduce your money factor, or overall interest paid over the course of your lease. Although this can be quite a bit of money upfront, you can save thousands of dollars in the long run and get the same amount back at the very end of your lease.