Lease then Buyout - Contract Explanation

[Mach_Tuck]

Hi All

There has been lots of discussion on this topic so figured i would provide the details based on the actual lease contract.

Section 23B "Purchase Option Before Maturity" states that you have the option of purchase anytime before scheduled maturity, so long as you are not in Default of the Agreement, and under the terms of Section 9 and at an Adjusted Lease Balance as calculated in Section 22D.

Section 9 covers the Purchase Option Fee, if any. Mine was $0 but have heard values of up to $300 in other threads.

Section 22D explains how the Purchase Price is equal to the Adjusted Lease Balance and also how to calculate the same. In simple terms it states this:
Adjusted Lease Balance is the Adjusted Cap Cost disclosed in Section 7 minus all depreciation and amortization accrued (paid) up to the termination date calculated using the "Constant Yield Method." This method is used to determine the portion of the Rent Charge in Sec 7 that you owe for the buy off. If further defines the balance subject to rent charge as Adjusted Cap Cost minus the sum of; 1. all depreciation and amortized amounts accrued and 2. the first base monthly payment.

Essentially this states that you can, at any time, buy out the lease prior to maturity. Rent Charges are "earned" and paid one month in advance on leases. That said, if you began the buyout process as soon as the info was available from KMF, you would be paying a portion of the rent charge for the time the vehicle was under lease. Rent charge is usually based on Adj Cap Cost + Residual Value...for the buyout, you only pay the portion of rent based on the adjusted cap cost.

Having only paid the first month payment (depreciation/amortization + rent + tax if applicable), you would take the adjusted cap cost and reduce it by this amount minus the rent and tax. This is your Adjusted Lease Balance. Because only one payment has been made, this number is also the "balance subject to rent charge" which would be multiplied by the Money Factor to get the portion of Rent owed. This means you pay a rent charge on the Adjusted Cap Cost minus the depreciation and amortization from the first payment only and NOT also on the Residual Value as it is normally calculated.

This value becomes your buyout number and you would owe any applicable taxes on this amount.

Hope this helps.

Cheers!

 

[Kia Stinger]

Looks like a "sticky" to me! Thank you for the explanation and information!

 

[SEA Stinger]

Great explanation, @Mach_Tuck!

This is in complete alignment with my lease agreement.

I suspect a fair number of people aren't aware that the Purchase Option Before Maturity is very different from defaulting on the lease.

 

[Big]

Hi All

There has been lots of discussion on this topic so figured i would provide the details based on the actual lease contract.

Section 23B "Purchase Option Before Maturity" states that you have the option of purchase anytime before scheduled maturity, so long as you are not in Default of the Agreement, and under the terms of Section 9 and at an Adjusted Lease Balance as calculated in Section 22D.

Section 9 covers the Purchase Option Fee, if any. Mine was $0 but have heard values of up to $300 in other threads.

Section 22D explains how the Purchase Price is equal to the Adjusted Lease Balance and also how to calculate the same. In simple terms it states this:
Adjusted Lease Balance is the Adjusted Cap Cost disclosed in Section 7 minus all depreciation and amortization accrued (paid) up to the termination date calculated using the "Constant Yield Method." This method is used to determine the portion of the Rent Charge in Sec 7 that you owe for the buy off. If further defines the balance subject to rent charge as Adjusted Cap Cost minus the sum of; 1. all depreciation and amortized amounts accrued and 2. the first base monthly payment.

Essentially this states that you can, at any time, buy out the lease prior to maturity. Rent Charges are "earned" and paid one month in advance on leases. That said, if you began the buyout process as soon as the info was available from KMF, you would be paying a portion of the rent charge for the time the vehicle was under lease. Rent charge is usually based on Adj Cap Cost + Residual Value...for the buyout, you only pay the portion of rent based on the adjusted cap cost.

Having only paid the first month payment (depreciation/amortization + rent + tax if applicable), you would take the adjusted cap cost and reduce it by this amount minus the rent and tax. This is your Adjusted Lease Balance. Because only one payment has been made, this number is also the "balance subject to rent charge" which would be multiplied by the Money Factor to get the portion of Rent owed. This means you pay a rent charge on the Adjusted Cap Cost minus the depreciation and amortization from the first payment only and NOT also on the Residual Value as it is normally calculated.

This value becomes your buyout number and you would owe any applicable taxes on this amount.

Hope this helps.

Cheers!

Hi Mach_Tuck,

Thanks for the explanation. Could you actually run some numbers through your calculation to illustrate how this would work? I was considering acquiring Kia Stinger 2.0 Premium, AWD, Driver Assist Package (MSRP ~ $42,400) via a lease to take advantage of the lease rebate ($6700) and then buying out the lease within the first month. I was told by the dealer that the buyout amount would be the sum of the 1) remaining payments $18515 (35 x $529), 2) Residual $21200, 3)Taxes on Residual $1325, 4) Purchase fee $300 for a total buyout amount of $41340. My total out of pocket cost to me would be my first payment of $529 + buyout $41340 = $41869. How does this compare with the buyout I would get using your calculation? The specifics of my deal are below.

From my Dealer:

Lease Arrangement:

· 3 years 10,000 miles per year

· Money Factor = 0.00195

· Zero down

· Lease Cash = $6,700

· Residual value is 50% (goes off of MSRP)= $21,200

Payment = $529/month based on the following

· MSRP = $42,400

· Purchase price at invoice = $40,141

· Taxes @ 6.25%

Fees:

· Reg fee $95

· Title fee $75

· State Inspection $35

· Doc fee $429

· Acq fee $650

· Kia has a $300 purchase fee if you purchase the car.

 

[Chris]

Hey big, I'm pretty sure your dealer has it wrong. You shouldn't have to pay the full amount of your lease payments. That is paying all the interest for 3 years when you only had the car for 1 month. I would think you pay the total of your lease payments minus the mf. Plus you are paying interest in the residual as well when you lease, shouldn't have to pay that either. I might be wrong though, but if not it doesn't make sense to pay interest on the lease and then turn around and pay interest again on a loan..

 

[Mach_Tuck]

Chris is correct. Immediate buyout mitigates almost all of the rent charge (interest) which is applied to both the Adjusted Cap Cost and Residule Value.

Without seeing the contract it would be difficult for me to be exact. But based on the numbers above...

Adjusted Cap Cost is $40141 - $6700 = $33441
Rent charge per month is ($33441 + $21200) * 0.00195 = $106.54
You must have rolled some other stuff into amortized amounts because I calc the base payment at $446.56 without tax and $473.91 with tax. I'll use your monthly of $529 below however.

Adjusted lease balance per section 22D would be $33441 minus any accrued/paid depreciation and amortization...so $423 ($529-$106). Now you are at $33018. Remember that rent charges are earned in advance. So, assuming you do this right away, the portion of unearned rent for the month would be retuned/factored in. Assuming same day buyout, the depreciation and amortized amounts paid is only the first month so it would still be the $33018. This would be the balance subject to rent so $33018 * 0.00195 = $64. The remainder of the $106 rent charge comes from interest on the residual which, as Chris mentioned, is no longer required.

There may be some daily interest factored in as the contract mentions the constant yield method but it would be minimal at best. This is standard for a typical 10 day buyout amount on any loan.

That all said, I would approx your same day buyout (adjusted lease balance per sec 22D) to be approx $33K plus tax, so approx $35K'ish total.

I'd also like to add that I'd take 6.25% along with those license fees anyway of the year. Much higher for both here in AZ.

 

[Brian Lewis]

So, I am looking to purchase a Stinger with out taking out a loan. Paying Cash. Based on what I am seeing above, seems that I would be better to follow your steps. The MSRP is $52,535 for a GT2 AWD. I have not started negotiations but I am 100% going to buy the car. There is 3 exact cars I am looking for at 3 different dealers within my area.

My question is, do to the huge discount Kia is giving for a Lease, would I be saving allot of money by do the above versus just writing a check?

 

[Chris]

So, I am looking to purchase a Stinger with out taking out a loan. Paying Cash. Based on what I am seeing above, seems that I would be better to follow your steps. The MSRP is $52,535 for a GT2 AWD. I have not started negotiations but I am 100% going to buy the car. There is 3 exact cars I am looking for at 3 different dealers within my area.

My question is, do to the huge discount Kia is giving for a Lease, would I be saving allot of money by do the above versus just writing a check?

Seems like you would save at least 5k, maybe a little more.

 

[Stingerguy]

I think in Texas you would have to pay tax twice on the car if you do a lease buyout. They charge tax on the full price of the vehicle when you lease, and then again if you buy the vehicle off lease. Totally ridiculous... Anyone care to chime in on this? Not worth it if that’s the case.

 

[robz32]

So, I am looking to purchase a Stinger with out taking out a loan. Paying Cash. Based on what I am seeing above, seems that I would be better to follow your steps. The MSRP is $52,535 for a GT2 AWD. I have not started negotiations but I am 100% going to buy the car. There is 3 exact cars I am looking for at 3 different dealers within my area.

My question is, do to the huge discount Kia is giving for a Lease, would I be saving allot of money by do the above versus just writing a check?

Yes you will be saving quite a bit. Get the lease, wait a week, so that KFA gets everything sorted and then buy out the lease. Keep in mind that you will be paying the per diem interest accumulated until that point and whatever buyout fees they may have, if any.

 

[jwhollan]

So, I am looking to purchase a Stinger with out taking out a loan. Paying Cash. Based on what I am seeing above, seems that I would be better to follow your steps. The MSRP is $52,535 for a GT2 AWD. I have not started negotiations but I am 100% going to buy the car. There is 3 exact cars I am looking for at 3 different dealers within my area.

My question is, do to the huge discount Kia is giving for a Lease, would I be saving allot of money by do the above versus just writing a check?

I'll use my car as an example since I also have a GT2 AWD that MSRP'd for about the same as what your looking at.

I negotiated the Price down to $50,299. Had I paid cash, with tax I would have paid $53,820 out of pocket. Instead I signed a lease and took the $6800 incentive (it's $7200 now). I paid one month payment up front, and have since paid one additional payment and the KMF website says my buyout INCLUDING tax is $49,035. I can write a check for that amount right now.

I don't know as much about all of the fancy math they are talking about in this thread, but my real-world experience tells me that yes, you would save $4k or more by leasing and immediately writing a check afterword.

 

[Brian Lewis]

Do we know when the offer ends?

I'll use my car as an example since I also have a GT2 AWD that MSRP'd for about the same as what your looking at.

I negotiated the Price down to $50,299. Had I paid cash, with tax I would have paid $53,820 out of pocket. Instead I signed a lease and took the $6800 incentive (it's $7200 now). I paid one month payment up front, and have since paid one additional payment and the KMF website says my buyout INCLUDING tax is $49,035. I can write a check for that amount right now.

I don't know as much about all of the fancy math they are talking about in this thread, but my real-world experience tells me that yes, you would save $4k or more by leasing and immediately writing a check afterword.

 

[jwhollan]

Do we know when the offer ends?

$7200 lease cash ends Feb 28th. Almost certainly there will be a new lease offer starting March 1st, but it's tough to say if it will be better, worse, or about the same.

 

[Wolvesq]

Thanks for putting all of this together. I just found this forum and this, and other posts like it, have been a lot of help.

One question. In many states, if you trade in a car against a new purchase, you only pay taxes on the difference. (e.g. new car is $40k, trade in is worth $15k, so you only pay tax on $25k difference.)

Anyone know if you you still take advantage of that in a lease and buy off? For example, let's say you owe $50k to pay off the lease. Presumably you have to pay tax calculated against that $50k. But will Kia financial let you trade in a car with the dealer against that $50k owed, so as to only pay tax on the difference, as if you were straight up buying it? I'm skeptical they would, but thought it worth asking about in case anyone here has tried it. Thanks.

 

[Brian Lewis]

Has anyone ever used the lease guide that you can purchase online?

 

[Kia Stinger]

Has anyone ever used the lease guide that you can purchase online?

Which one? Any of those listed here?: Car lease guides on Amazon

 

[Wolvesq]

FYI -- I went to the dealer today and had my question answered. In short, as I thought, no, you cannot trade a car against a lease payoff and pay tax only on the difference.

 

[Brian Lewis]

I am working my a dealer now and looking to go the Lease route described above instead of just paying Cash all at once. My question is, would it help to pay more money down or does it not matter at all?

 

[jwhollan]

I am working my a dealer now and looking to go the Lease route described above instead of just paying Cash all at once. My question is, would it help to pay more money down or does it not matter at all?

That depends how quickly you plan to buy it out. If you do it immediately then it won’t matter at all, but every lease payment you make before buying it out will include some interest which you could reduce by putting a down payment

 

[MarkyMark]

@Brian Lewis,

People put down payments on a lease, because they want as small a monthly payment as possibe. The also want a high residual price of the car, so as to has as little car in their 24/36 month lease.

Neither of these factors is what you are considering, because you will purcahse. So money down is great. Because if you will get a loan for the residual, the lower the loan the better. But if it's all cash front and back end of the lease, and you are just going for taking advantage of the lease cash, then paying down or on the residual shouldn't really make much of a difference if any... I'm assuming conducting the buyout in 4-7 days after doing the paperwork.

Sounds like you are on top of this, but just in case, the big points for you will be negotiating off the MSRP right off the bat as much as possibl (Costco - I like it - $500 off invoice). And then get the lease cash addded to that figure. Get the low Money Factor - the .0004 many dealers try to keep in the percentage.

Other than that you should be good to go! Good luck! Let us know how it goes!