Traditionally, when buying or leasing a vehicle, it is always best to have a down payment ready. It is the smart choice to reduce your overall payments. Making a big down payment will lower your monthly payments and will leave you less likely to be ‘upside down’ if the car is totalled. This means your loan balance owing is worth more than the value of your car. However, it is possible to secure a car lease that works with your budget. In fact, if the lease terms are good, the smart play may be to put as little money down as possible. In this article, we will breakdown how your car lease is/is not affected by a down payment to help you decide if money upfront is the right choice for you.
What is a leasing agreement?
A lease agreement for your car is similar to a rental agreement for your apartment. When you lease a vehicle, you make regular payments on a car over a short-fixed term. Typically, they can be anywhere from two to four years. You will then have the option to return the vehicle once the lease is up, or purchase it outright. Monthly payments are based primarily on the difference between a vehicle’s sales price (including taxes and fees) and its residual value (the expectation of what it will 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. But if you’re leasing a car, especially a car with a low money factor, a low selling price, or both, then a large lease down payment may not be necessary.
Doesn’t a big down payment help when leasing a vehicle?
Not really. Leasing a vehicle isn’t like buying one. According to Carfax.com, most people make down payments when they buy cars to do one (or more) of these five things:
- Get a lower monthly payment.
- Minimize interest charges.
- Avoid being upside down in the event of a total loss of the car.
- Get a loan approved.
- Get a better interest rate.
Weighing the decision of making a large down payment
While it may seem like a down payment up front will make a difference at the end of your lease, it is always best to run your numbers. You don’t need a finance degree to determine if a large down payment is right for you. Firstly, ask your dealership to provide you with two lease quotes: one with the down payment amount and another with no down payment. Next, compare the offers. The total amount you’ll spend over the course of the lease:
- With a down payment: Paying $199 a month for 36 months, the total of payments will come to $10,163 on a $25,000 vehicle with $2,999 due at signing.
- No down payment: The second is $289 a month with zero money down. In the zero-money-down option, you’ll wind up spending $10,404. This deal costs an additional $90 a month.
Finally, look at where you will benefit the most. In the end, the no down payment option will cost you an additional $90 a month. While the total payment difference between the two options is $241, it is spread out through the length of your term. This adds roughly $6.70 to your monthly fee. However, by not paying any money down, the $2,999 stays in your wallet.
Are large down payments a requirement?
Many consumers assume that it is a requirement to make a down payment on a car lease. However, this is not true at all. In fact, many experts advise against ANY down payment when you lease. There are two important reasons for this:
1. Vehicle is stolen or totalled
One of the most important reasons for not investing a big down payment is that you can lose the money you put down if your vehicle is stolen or is involved in an accident and is now considered a total loss. This is especially true during the first few months of your lease. Even with GAP insurance, your down payment is still not fully protected.
2. Free up cash flow
Many consumers do not have several thousands of dollars at their disposal, necessitating leasing a car over financing one. One of the main advantages of a lease is low up-front costs which frees up your cash flow. Without a down payment, you may be able to come out ahead by investing that amount instead, or using it to settle other debt. Paying down the balance of a credit card, for example, might make more sense than making a big down payment on a car. This is especially if you are getting an ultra-low money factor on your lease.
Leased vehicles require you to have comprehensive and collision coverage. Most dealerships will likely include collision coverage, given the steep costs for replacing a leased or loaned vehicle.
Is a lease down payment ever worth it?
Sometimes, it makes sense. While many leases in the market have special low money factors (interest rate for the lease), not all do. If you’re leasing a vehicle with a high selling price and money factor, you may be better off initiating that lease with a significant down payment. But if you’re leasing a more modestly-priced vehicle with a special rate, beginning the lease with little to no upfront money may be the way to go.
A down payment can be beneficial for some. When you make a down payment on a lease, it’s known as a capitalized cost (cap cost) reduction. With an auto loan, the down payment decreases the amount you borrow. However, a down payment on a lease doesn’t decrease the cost of borrowing. Basically, the total amount you pay for a lease is set ahead of time. So, putting money down on it doesn’t reduce that overall cost. Still, it can help you month to month with managing your budget, especially if you have bad credit.
Is trading in a car for a lease a good idea?
Trading in a car you own for a lease down payment is similar to making a big down payment, so It’s best not to. If you’re willing to take the time to sell your car yourself, you’ll save money that you can use to help pay debt or put in savings for a rainy day. By not including your trade-in as part of your lease agreement, you also carry less risk of loss should your car be stolen or a total loss.
If you’re the type of person who likes having a brand new car every few years, then leasing a vehicle is a much better option, financially. If you are considering whether or not a down payment is best for you, it is important to have the dealership walk you through all of your options. Then, when you’re ready, our isure brokers can help you get the best auto insurance rates for your new ride.
Stay safe on the roads!