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# Tips on Buying Cars/lease negative equity question

Question
I know you have answered this question before, but I question a specific detail about how negative equity is calculated into a lease contract and hope you can help.  My partner wants to trade his BMW M3 in and lease a new Infiniti Q50 or Volvo S60 to lower payments and fuel costs.  There is about \$4,000 in negative equity.  I noticed that the negative equity gets factored into the capital cost.  Then, the contract factors depreciation (roughly 37%), the money factor, and finally the monthly payment.  By this method it appears that he will only pay 37% of the negative equity.  How can this be?  Or, am I misreading the typical lease contract.  Thank you.

Hi Jesse ...

First off your partner may not have 4,000 in negative equity if he were to retail the Beemer himself on Craigslist ...that's the smartest way to do it!!

But if for whatever reason that isn't a viable option then here is how it works:

The Cap Cost is the (Hopefully) discounted price you pay for the car to that number ...let's use 35,000 for the price he negotiates the cars actual MSRP before any package discounts (the highest number you can find on the Munroney sticker so not counting any ADM is the number that the residual is multiplied against ...so in our example lets say the MSRP (before discounts) is 37,500...if the residual is 70% then (.70 x 37,500 = 26,250 = LEV or Lease End Value)

so back to our calculations for this car you take the cap cost

\$35,000.00 PLUS trade in value of lets say 10,000 minus the payoff of 14,000 = 39,000.00 plus DMV Fees  etc. The bank is going to write a check to the dealer for the 39k...he is going to pay interest on the 39k ...what makes the payment lower (usually) is the principle amount he pays back is alot less than the 39k ...its only 39k - 26,250 = 12,750 do you see that ALL of his negative equity is being paid back? with no negative equity the principle payback would be only 8,750. or 4k less .... sales tax is assessed to each payment equally as they are paid (in most states) (unless you are in Oregon ...Home of the Oregon Ducks!! Go Ducks!) where you pay zero sales tax. let me know if I need to go further or if this answers your question because I am all yours until you are completely happy (and dually impressed no doubt lol)

Roger

Volunteer

#### Roger Alvey

##### Experience

20 years industry experience in top management of dealerships and dealer groups. Recognized industry expert since 2004 in the Top 10 industry experts for The Gerson Lehrman Groups Auto Industry Council. I also do consulting work for Atheneum Partners, Expert 360, Expert Connect and Coleman Research. I have been a franchise owner and understand all facets of the auto industry from the time the car leaves the factory until it leaves the lot with it's new owner. I have written training materials for both the prime and the subprime sales and finance process.

Organizations

Publications
Special Finance Insider, Dealer, and Automotive News, Gerson Lehrman Group Auto Industry Council News (frequently)

Education/Credentials
Willamette University - Salem Oregon BA Economics Willamette University Graduate School of Business - Econometrics Statistics

Awards and Honors
GM's Award of (their most prestigious award) Given to Dealers who surpass their annual benchmark planning volume while also maintaining Top Box (top 5%) CSI

Past/Present Clients
Citadel Investment Group , Summit Partners US ,Broad Peak Investment Management, Nautic Partners, LLC, Hellman & Friedman Investors, L.P. and over 40 additional money managers, hedge funds and research groups