No, you probably shouldn’t put a big down payment on a car lease. You may be tempted to make a large down payment on a lease, as you would when buying and financing a car, but here’s why that may not be a good idea.
How Car Leasing Works
For starters, leasing a car is not the same as buying one. A lease is essentially an extended rental that typically runs from 24 to 39 months. Monthly payments are based primarily on the difference between a vehicle’s sales price (including taxes and fees) and its residual value (what it’s expected to be worth at the end of the lease contract). That amount, minus any down payment, is financed at an interest rate, which is known as the money factor.
When your lease is up, you can either return the vehicle or purchase it at a predetermined price. If the predicted residual value ends up being lower than what the vehicle is actually worth at the end of the term, you can make some money purchasing the car and selling it to another party for a profit.
Leasing guarantees you’ll be making perpetual car payments, but they’re typically lower than conventional financing payments. On the downside, leases come with strict mileage limits. Exceed them, and per-mile penalties add up quickly.
Likewise, you’ll be charged an excess-wear-and-tear fee if you return the vehicle in subpar shape. You’ll likely also face an acquisition fee of a few hundred dollars up front, and a disposition fee at the end of the term.
Working the Numbers
If all else is equal, making a larger down payment will result in lower monthly lease payments. The down payment usually consists of the first month’s installment and a payment that lowers the amount you’re financing. This is usually referred to as cash due at signing. If you have good credit, you will usually be able to lease a car with zero cash due at signing, but your payments will be higher than if you’d put money down.
Here’s an example of how a down payment affects leasing terms: There are two lease deals for the same $25,000 vehicle. Not including taxes and fees, one is $199 a month for 36 months with $2,999 due at signing. The second is $289 a month with zero money down. Choosing the zero-down deal keeps that $2,999 in your pocket. Still, this deal costs an additional $90 a month.
How’s the math work out? If you put the $2,999 down, after the 36 months (all other fees aside, since they’d be pretty much the same in either case), the total of payments would come to $10,163. In the zero-money-down option, you’d wind up spending $10,404. That’s a $241 penalty, but it’s paid out over 36 months – about $6.70 a month – and it keeps the $2,999 in your pocket at the outset.
Your Down Payment Isn’t as Protected in a Lease
If you’re financing a new vehicle, making a bigger down payment increases your equity in it. This helps to ensure you won’t wind up owing more money than the vehicle is worth. If the vehicle is worth less than what you owe on it, and the vehicle is stolen or totaled, you’ll owe the difference between the insurance payout and the outstanding loan balance.
By contrast, a down payment on a lease is merely an advance payment on the deal. Many leases have gap insurance built into the contract. This pays the difference between what the car is worth and how much is owed on it. You will not, however, get back your down payment.
It’s best not to make a down payment for a lease. Paying a large amount of cash up front on a lease tends to defeat its advantage as a money-saver. You may be able to come out ahead by investing the amount instead, or using it to settle other debt. Plus, in many states, you’ll have to pay sales tax on the amount due at signing.
Many personal finance websites have calculators that will determine monthly lease payments based on the size of your down payment, the purchase price, number of payments, sales tax rate, current interest rate, and the vehicle’s expected residual value. As you run the numbers, be sure to determine your total long-term costs by multiplying the monthly payment by the number of installments and adding the down payment, if any, along with other applicable expenses.
Trading in a Car for a Lease
Trading in a car you own for a lease down payment is similar to making a big down payment, so our advice is the same: It’s best not to. The convenience may outweigh the risk to your down payment in the event of an accident, but if you’re willing to take the time to sell your car yourself, you’ll save money and carry less risk of loss.
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