Why You Should Minimize Your Down Payment on a Lease

A hefty down payment can be a significant advantage when you’re buying a car. Among the many and varied reasons this is true are lower interest charges, staying out in front of depreciation and easier loan approval. However, none of these factors come into play when you’re leasing a car, which is just the beginning of why you should minimize your down payment on a lease in many cases.

 

Overall Lease Price Is the Same Regardless

While it’s true the down payment will make your monthly payments lower, the overall amount you’ll pay remains the same. CarsDirect.com illustrates this as follows:

“Let’s say your lease costs $5,000 for 24 months including taxes. If you make a $1,500 down payment, you’re going to pay $3,500 over that 24-month lease term, which makes your monthly payment $145.84. If you make a $500 down payment, you’re going to pay $4,500 over 24 months, or $187.50 per month. Either way, you’re still paying $5,000 total.”

This is because interest charges are computed into the lease payment up front. You’ll find them listed in the contract as the “money factor” amount you submit with each monthly payment.

 

You Won’t Get That Money Back

Let’s say you go into a lease with a $5,000 down payment. However, rather than a down payment, it’s called a capital cost reduction. This because its true purpose is to reduce the amount of money the leasing company has to put forth on your behalf to acquire the car from the dealer.

Now, let’s say the car is involved in an accident one year later and declared a total loss. Your insurance company steps in and pays the leasing company what the car is worth on the open market. Gap insurance will cover the difference between what’s owed and the car’s actual market value if there’s a disparity between that value and the payoff amount.

However, all of that money will go to the leasing company. Your $5,000 is gone forever. You’ll have no car and you’ll have to come up with drive-off costs once again to lease another one.

 

That Money Will Serve You Better Used Differently

Rather than putting so much money into your car lease to lower your payment only slightly, consider using it to pay off a high-interest credit card instead. Invest the cash in a money market fund or use it to beef up your emergency reserves in an interest-bearing checking account if you’re debt-free. You’ll be better served with either of those choices than tying the money up in a leased vehicle.

 

There Are Some Exceptions

The points above apply when your lease has a low money factor, as the best lease deals generally do. However, if you’re after a high-value model and the money factor is also high, a larger down payment can make the lease payment more affordable.

Again though, the leasing company will get all of the insurance payout if something goes sideways and the car is crashed or stolen, so that’s a decision you’ll need to make. Bottom line, though: While a larger down payment makes good sense when you’re buying a car to keep, it can be a mistake when you’re leasing a car for a few years.

It’s important to stop and review the situation carefully before you make that final decision. The cash you save will be your own, which is why you should minimize your down payment on a lease (in most cases).

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.