Traditional car buying advice tells you to make a hefty down payment.
That advice is as solid as ever.
Making a big down payment lowers your monthly payments and leaves you less likely to be upside down if the car is totaled or you decide to trade in the vehicle before it’s paid off.
But if you’re leasing a car, especially a car with a low money factor, a low selling price or both, that advice may not apply.
In fact, if the lease terms are good, the smart play may be to put down as little money down as possible.
What Goes Into a Lease?
A lease payment is essentially made up of the difference between a vehicle’s selling price and its residual amount.
Add in the money factor (the interest rate for a lease), a few fees and taxes, and you have the bulk of your lease payment. Here’s an example:
Imagine getting a car that has an MSRP of $22,000 and a 50 percent residual.
Fifty percent of $22,000 is $11,000, so that would be the residual amount.
If you were able to get a discount of $2,000 from $22,000 MSRP, the selling price would be $20,000.
Your lease would be based on the difference between the $20,000 selling price and the $11,000 residual.
In this example, the difference is $9,000.
The lease payment would be based on this $9,000, plus the corresponding money factor, taxes and fees.
While $9,000 isn’t pocket change, it also isn’t a loan amount that’s big enough to generate much in interest charges over the course of a 36-month lease, especially with a low money factor. (In the above scenario, using a money factor of 0.00015, a shopper would pay less than $200 in interest charges over the course of the lease.)
This is especially so if you’re somebody with good credit and you’re offered a low money factor. (Pro tip: To determine the actual interest rate of your money factor, simply multiply the money factor by 2,400.)
Should I Ever Put Money Down?
Sometimes it makes sense.
While many leases in the market have special low money factors, not all do.
If you’re leasing a vehicle with a high selling price and a high 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 an incentivized special rate, beginning the lease with little to no upfront money may be the way to go.
If you are thinking of leasing a new car, and you have good or excellent credit, whether you put money down on a lease purchase will usually be up to you.
While many car dealerships will recommend that you make a fairly substantial down payment on a leased vehicle, you should try to avoid leases that require a large deposit or initial payment.
When you are thinking of leasing a new vehicle, you should consider that the strategy involved in leasing a new car is in many ways directly opposite to that used to buy a vehicle.
While a down payment is usually a good idea for purchasing a vehicle–you should avoid leasing contracts that require a down payment.
When leasing the vehicle, the down payment is usually called a Cap Cost Reduction.
Many times, customers will put down a fairly substantial amount of money in order to lower their monthly payments.
While making the down payment will certainly reduce your monthly payments somewhat, you should consider this: you could get into a serious accident in the first few months of the lease, and the car may be totaled.
If something like this happens, your down payment is completely lost. Even if you have high-quality collision insurance and gap insurance, none of your down payment will ever be refunded.
No Max Down Payment Means Zero Down
When thinking about leasing a car, you want to avoid down payments at all costs.
Because leasing a car will help you maximize your cash flow, tying up a lot of money in a lease down payment is certainly not the way to go.
So, instead of making a down payment of $3000 or $4000, put that money into a separate bank account and make your higher lease payments out of that account.
In fact, if you choose an interest-bearing account, you may actually earn a few dollars in the process.
You can take the no down payment strategy one step further by rolling all of the drive off costs into the monthly lease payment as well–this results in nothing being paid up front.
Drive-off fees are lease-related fees required to drive your car off the lot, such as: a security deposit, acquisition fee, service fees, and drive-out charges or similar.
Finance It All and Still Save
By rolling all of these fees into your monthly lease payment, you are able to drive off the lot with absolutely no money tied up in your new car and all of it in your bank account.
You will find that even if you do roll all of these fees into your monthly payment, the monthly payment will usually still be much less than a monthly car payment required with a standard vehicle purchase.
So, when you are trying to arrange financing for your next new car or truck purchase, you always need to consider the initial costs, as well as the longer-term financial picture.
Under ideal conditions, you always want to maximize the power of your capital while retaining as many options as possible.
So, if you’re thinking of leasing a vehicle–a zero down payment will put you in the strongest possible to better manage the money you save.
Doesn’t a Big Down Payment Help Me When I’m Leasing?
Not really. That’s because leasing isn’t like buying.
Most people make down payments when they buy cars to do one or more of these five things:
- Get a lower monthly payment.
2. Minimize interest charges.
3. Avoid being upside down in the event of a total loss of the car.
4. Get a loan approved.
5. Get a better interest rate.
Some of these things aren’t an issue if you’re leasing:
- Getting a lower monthly payment: Making a sizable down payment will certainly reduce your monthly lease payments, but it probably won’t save you a ton of money compared to the overall cost of ownership while you lease.
- That’s because a low money factor means negligible interest charges.
Minimizing interest charges: If there’s a low money factor, there’s minimal interest.
3. Avoiding the “upside down” trap: Most leases come with gap insurance, which minimizes the chances of being on the hook for any unpaid balance if the car is totaled or stolen.
- If the loan amount exceeds the value of the vehicle at lease end, the difference in value is the bank’s problem, not yours.
Getting a loan approved: In most cases, shoppers with good credit won’t need to make a significant down payment in order to be approved for the best rates.
5. Getting a better interest rate: Making a bigger down payment won’t get you a lower money factor. That’s just how leasing works.
What Difference Does a Max Down Payment on a Lease Make?
It isn’t hard to determine if a large down payment is right for you.
Simply ask your dealership to provide you with two lease quotes: one with the down payment amount you’re considering starting the lease with and another with no down payment.
Take the offers and compare the total amount you’d spend over the course of the lease.
To find the overall amount spent, multiply the monthly payment by the number of payments due and combine that with the down payment amount, including all startup costs.
With the total lease costs in front of you, the decision becomes easier.
Here’s an example of how to make the calculations using an advertised lease that’s being offered by a popular import automaker.
The lease offer: $1,999 down, 36 months at $189 per month.
I asked a local dealership that sells this brand to send me the lease special with different down payments, ranging from $0 to $2,999.
I also requested the total amount to start the lease, including drive-off fees (the first month’s payment and registration costs).
Since the drive-off fees include the first payment, there will be 35 remaining payments.
Let’s see how the math worked out:
Zero down payment plus $638 in drive-off fees
Total out-of-pocket to start: $638
Monthly payment: $268
$268 times 35 payments equals $9,380, plus the $638 out-of-pocket
Total lease cost: $10,018
$999 down plus $701 in drive-off fees
Total out-of-pocket to start: $1,700
Monthly payment: $237
$237 times 35 payments equals $8,295, plus the $1,700 out-of-pocket
Total lease cost: $9,995
$1,999 down plus $761 in drive-off fees
Total out-of-pocket to start: $2,760
Monthly payment: $206
$206 times 35 payments equals $7,210, plus the $2,760 out-of-pocket
Total lease cost: $9,970
$2,999 down plus $824 in drive-off fees
Total out-of-pocket to start $3,823
Monthly payment: $175
$175 times 35 payments equals $6,125, plus the $3,823 out-of-pocket
Total lease cost: $9,948
In this case, making a large down payment reduces the monthly payment. But, it doesn’t save much money over the course of the lease.
There’s just a $70 difference between the zero-down lease and the $2,999 down payment lease.
Any More Reasons for No Money Down?
Yes. Here are two more points worth considering:
- There is no guarantee you will get your down payment back should your leased vehicle be stolen or totaled in an accident.
- Imagine making a $3,000, $4,000 or $5,000 down payment just to see it go up in smoke if the vehicle is deemed a total loss six months later.
Gap insurance won’t help you in such a case.
It will cover the difference between the car’s value. Its payoff amount in the event that you owe more on it than it’s worth.
But if a leased car is totaled or stolen, the lease just terminates. The buyer doesn’t get back the down payment.
- Is your goal is to minimize paying interest on money you borrow? Apply what you’d spend as a down payment to another debt that has a higher interest rate. Your credit cards, for example.
- Paying down that balance might make more sense than making a big down payment on a car, especially if you are getting an ultra-low money factor on your lease.
Related Questions and Answers
What Kind of Rates Can You Expect on a Zero Down Car Loan?
Although the zero down car loan incentive program says you have a 0 percent APR for x number of months, read the fine print. You’ll find that you have to have a credit (FICO) score in the 700s to qualify for the real 0 percent APR program.
In most cases, especially if your credit is fair to middling, you’ll probably end up paying anywhere between 5 and 10 percent for the privilege of getting a 0 percent APR.
The 0 percent APR is just the come on to get you in, and the other language in the small print tells you that you may be charged certain fees in order to obtain it.
What is Cap Cost Reduction in a Car Lease?
A cap cost reduction in a lease is very easy to understand. True, if you put it into standard car-buying terms, not leasing/business terms.
When you buy a car, there comes a point where everyone has shaken hands and you sign over a down payment on the vehicle (plus your own vehicle, if it’s a trade).
This is the capital cost reduction in a car lease. It’s anything you put down up front to help keep the cost down or to help obtain a special incentive program.
If your credit’s poor, it may also be needed to help you get the lease.