[ozzied]

(I've also posted this on Edmunds forums)

Hi

Just had a bit of a brainstorm for those thinking of leases on Volts. May be a bit of a stretch but could appeal to some of you. I am a member of Pentagon Federal Credit Union and they offer a balloon payment option -- similar to a lease but you own the car. It is pretty easy to join penfed www.penfed.org. At any rate, Penfed offers 1.74% interest on these balloon deals. Here is my math

As a price proxy, I used www.fitzmall.com who is offering a 2013 Volt for $39282 (MSRP of $40,845). I rounded this up to $40,500 to cover TTL. Assume with purchase, you will get a $7500 tax credit as a down payment (that is, you would likely have to come up with $7500 down at purchase but assume you will get it back in taxes). No other money down required

Given this, Penfed monthly payments would be

$401/Month for a 36 month balloon (Balloon balance of $20,351)
$416/Month for a 24 month balloon (Balloon balance of $24,416)

Of course there are many advantages/disadvantages relative to a lease. this might appeal to those who get a state credit for purchase. This might also appeal to those who dont want to worry about miles. On the flip side, you dont just to get to turn it back in if you dont like it - you would have to sell it and hope you can cover the balance or you would have to refinance the balance.

Still this might appeal to a select few of you. I realize others may view this as a nonsense option

Just a thought

Dave

 

[TomVolt12]

I have always thought this is a good idea versus the I want to buy, can't afford the payments, and will buy out with another loan. I think the dealers don't like it because they get no extra kickback for the lease origination.

Good post

 

[bonaire]

I wonder what the lease origination fee is. For Ally's 0% loan, I wonder if dealers also get kickback over a buyer paying cash?

When I talked to a guy a year ago for a Solar PV system, he said that he offered 0% 1-year same as cash financing. But it cost him a fee to offer that and would give me a cash discount if I paid cash rather than financed. The thing with car dealerships getting kickback must be something to help drive the economy over the small guy. My roofer also said the same thing.

As I near 50 years old, I find that balloon and other types of fancy financing can get people into trouble faster than standard loans. Imagine thinking you will "some day" afford the loan balloon payment but don't get the expected raises or have another child or something else happens and payment is tough to come by. Plus, if you need the balloon, you may also not make enough income to afford the full 7500 federal tax credit. You're on the hook to do something about the payment or sell the car in those cases rather than having a fixed budget to follow. I always tell people to "see what Dave thinks" and check with Dave Ramsey (money-guy, talk show host, author) in terms of stretch-financing. He will always say avoid leasing and actually buy gently used cars. If someone needs stretch-financing to buy a new car, they really, really should look at their personal budget to see if they truly need it or are giving themselves extra risk. Saying "no" to yourself if you don't meet budget risks is doing yourself a favor. I wish our government would do this too.

So, in closing - the idea of stretching to buy a new Volt should be quelled and you may want to buy a used 2011 Volt when they come off lease in a few months in 2013. Used car loans do have higher percent rates - but the cost is far less. Heck - try to find a used Volt with 50K miles on it and it should be well under $20K.

 

[william]

all good points. however, remember that the loan is secured by the car. so, in a sense, the question is, what are the loan payments relative to lease payments? I am not advocating strategic default, but if you are paying $30/month less for the car loan than you would for the car lease, and you paid zero downpayment (bc you got the full fed tax credit) and you put down $1500 or $2000 for the lease, you are way ahead by doing the balloon loan and risking having to give the car back--in my scenario, you'd be~$5000 ahead after 2 years. a more conservative assumption about the spread between loan and lease payments would still yield $3000 benefit over 3 years which is pretty good.

 

[TomVolt12]

I actually agree with your analysis. The point Bonaire makes as to financial risk is also quite valid. Therefore the safe middle way is to do a balloon deal only if you have the balloon payment invested and available if you need it.

 

[bonaire]

all good points. however, remember that the loan is secured by the car. so, in a sense, the question is, what are the loan payments relative to lease payments? I am not advocating strategic default, but if you are paying $30/month less for the car loan than you would for the car lease, and you paid zero downpayment (bc you got the full fed tax credit) and you put down $1500 or $2000 for the lease, you are way ahead by doing the balloon loan and risking having to give the car back--in my scenario, you'd be~$5000 ahead after 2 years. a more conservative assumption about the spread between loan and lease payments would still yield $3000 benefit over 3 years which is pretty good.

I've used some balloon payment things from time to time but most are zero-percent for 1-year with like a 20% accrued interest waiting at the end if I don't make that final, full payment. I figure "free money" for a year in those cases. For the balloon to be nicely positive, you could take the tax return and put it into a high-yield bond fund or similar for 5% or higher annual income on it. Or a good stock that pays 3% dividends and is at moderately depressed value at the time. Anyone with a mortgage should also consider putting the 7500 directly against the mortgage even if it is 4%. Paying off a mortgage can be a pretty solid use of the money.

The loan is secured by the car - but the risk isn't in the car, it's actually in your personal credit history. Default on the balloon payment and you get dinged by a pretty sizeable number on the credit report for a while. it's not a short-sale or BK but it's bad-enough to hurt you next time you go looking for a loan.

People like Dave Ramsey or even my mom (who lived frugally) make me want to see people actually get out of debt rather than work ways to get more into debt. So, hopefully you see that I'm trying to help mitigate your risk.

If you guys also look at the GM Card, it helps. I used mine for about 9 months from sign-up to when I bought my Volt. I racked up the $1K in earnings by using it for business travel and lots of typical bill-paying. That $1K then was augmented by $1500 more when they sent a flyer out saying "here's another 1500...". That helped me decide to go for it along with finding a 2011 in July of 2012 and that also was about $5K off MSRP. So use those tactics to help in the whole "cost of ownership" stuff. (Add to that 3500 more in rebate from PA). If I get another 1500 flyer in the mail - I may be buying a 2nd Volt or even a Spark EV if they become available here on the east coast.

 

[william]

absolutely. also, while we are on the topic, i had a sales guy try to discourage me from trading in a car to do a lease--he said that after about $5000 in trade in value, you reach a point of diminishing returns on the lease cost. (he didn't use that term but it's what he meant). however, i decided differently. if you look at the overall cost of owning car ownership over three years, it can make great sense to do a higher value trade in, if only because ally is charging 2% interest and you pay tax on the principal lease payment every month. in my mind the value of a trade in (assuming you don't take too much of a batch on the deal value) is that it lowers the cost of the car you are buying, thus reducing your sales tax burden a lot. in CA where the sales tax is about 10%, that's a big deal.

point is, for all these things ways of buying and owning, a great way to think about it is to actually put down on paper your total cost of ownership over the period you plan to own the car. we all know that if you plan on driving it until it falls apart in 10 years or so, you get the lowest overall average cost. but if you are looking at a 3 year horizon, things definitely can move around pretty interestingly.

 

[william]

and yes, correct. I do NOT advocate strategic default on car loans. it does ding your credit score. i was however pointing out that the risk is lower than it might seem and there are some funky economic incentives being produced by the combo of the tax credits, current interest rates and the relatively exotic financing deals out there. me, i could have bought for cash or financed for 60 months at zero percent but i traded in a nearly decade old big gas guzzling SUV that was leaking oil and starting to smell that cost me $300-350/month in gas and oil alone for a car that is highly fuel efficient (and smells GOOD not bad ) and, all in, will cost me about $200/month including tax and fuel (bc of the trade in). sure, in 3 years I will have to buy a new car but that's ok, i expect technoloigy to have really made some gains by then. or I'll be able to afford a Tesla