Lease Down Payments
Why do people choose to lease rather than buy a new car? While reasons vary among buyers, one common factor is the lower down payment required by the dealership.
As with anything, though, there are pros and cons to putting an amount of money down for a new car lease.
The Function of a Down Payment
Typically, a down payment for a leased vehicle reduces the remaining balance for the car, for which you will be paying monthly installments. A higher or lower down payment can affect how high or low those monthly payments will be.
Sometimes, dealerships that offer special incentives like low interest rates or other low-cost benefits will require a down payment as part of the promotion.
When you use a down payment to lower the remaining monthly payments, it is known as a cap cost reduction. It can be in the form of cash, trade-in value, or rebates.
Determining Monthly Payments
A down payment isn't the only factor that determines your monthly payment amount. Other factors include:
- The vehicle's residual value.
- Residual value is the predetermined amount of money the vehicle will be worth at the end of the lease.
- It is usually non-negotiable.
- A car with a high residual value depreciates less—which means it's worth more at the end of the lease.
- Since you end up paying for the deprecation of the vehicle during the lease, a car that will depreciates less can sometimes result in lower monthly payments.
- The overcall cost of the car.
- Similar to when you purchase a new car, you can negotiate the purchase price of a leased car.
- Negotiate before other terms of the lease are discussed to get a better rate and lower monthly payments.
- The interest rate.
- High interest rates will significantly impact your monthly payments.
Down Payments vs. Closing Costs
New car leases are often advertised with “zero money down at lease signing" to attract new customers. While this seems like a tempting offer, be aware that the down payment isn't the only fee you will be required to pay.
Other costs may be due even without a required down payment, commonly referred to as “closing costs."
Closing costs can include (but are not limited to):
- A security deposit.
- Acquisition fees.
- Service fees.
- Drive-out charges.
- First month's payment.
- Official fees required by the city, county, or state.
Sometimes these additional costs can be included into the amount you finance, but the result will be an increase in your monthly payments.
Pros & Cons of Lease Down Payments
Advantages of Down Payments
Typically when purchasing a new vehicle outright, a buyer should prepare to hand over around 20% of the purchase price as a down payment (this is just an estimate—some dealerships require more, some less). Most consumers that choose to lease a new car instead often do so because less money is required up front.
If you have the money on hand, however, choosing to put some money toward a down payment can often get you a much better deal. In addition to lowering your monthly payments, a few of the other advantages include:
- Lowering your interest rate.
- Getting a vehicle you might otherwise not be able to afford.
- A down payment can also help you to qualify for more expensive vehicles.
- Qualifying subprime buyers.
- If you have a low credit score, it might be difficult to qualify for a new car lease. Paying some money up front can help you to qualify.
- Taking advantage of special incentives.
- Some incentives, rebates, and upgrades offered by manufacturers and dealerships require a down payment to qualify.
Disadvantages of Down Payments
Putting money down on a car lease may not be the best idea for some. If you don't plan to choose the buyout option at the end of the lease, there will be some disadvantages to putting a chunk of your hard-earned money into a car you never plan to own.
Some of these disadvantages include:
- Taking money out of the bank.
- Putting a large portion of cash into a lease means you can't use that money for other investments.
- You could be making money through interest accrual in a savings or other investment account.
- You won't get any return on your investment.
- Since you're leasing, you don't own the car.
- When the car is returned, you won't get any of your money back.
- Your down payment won't be protected.
- If your leased car is totaled in a car accident or is stolen, you won't get any of your money back.