When it comes to leasing a new car, whether you should or shouldn’t make a down payment depends on your individual situation. A down payment doesn’t help you save money on the overall cost of a lease like it does for an auto loan. However, it does reduce your monthly payment.
A Down Payment Doesn’t Lower the Lease Price
In a car lease, a down payment is often called a capitalized cost reduction, or cap cost reduction. Putting money down on a car lease isn't typically required unless you have bad credit.
If you aren't required to make a down payment on a lease, you generally shouldn't. The No. 1 thing to keep in mind is that putting money down on a lease doesn't lower the overall cost to save you money in the long run as it does with a car loan.
This is because all of the interest charges are computed into the lease price upfront, so the total cost of a lease is set ahead of time. Whether you make a down payment or not, the overall amount you pay doesn't change. However, putting money down does reduce your monthly payment.
For example: 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.
By comparison, a down payment affects a car loan very differently. In an auto loan, interest charges aren’t included in your purchase price. In fact, interest charges accrue daily based on the outstanding loan balance.
When you make a down payment on a car loan, you’re reducing the amount you borrow, and, therefore, the loan balance interest is charged on. This is why making a down payment on an auto loan lowers the overall cost.
Other Up-Front Leasing Costs
A downside of leasing is that you’re often required to pay an inception fee, which is a payment due at signing. Inception fees vary by lessor and can include charges for several different things. Some things included in inception fees can be:
- First monthly payment – It’s standard for lessors to ask for the first payment upfront.
- Acquisition fee – The fee the lease company charges to arrange the lease.
- Security deposit – A security deposit is sometimes required in higher-risk leases. They operate just like a security deposit on an apartment lease does. You get it back at the end of the term unless it's needed to cover any fees or penalties, such as damages from excess wear and tear.
- Title and license fees – Charges vary by state for vehicle registration, plating, and titling.
This is just an example of what you may be asked to pay before you drive off in a new leased car. However, depending on your situation, you may be able to have some or all of these fees rolled into your monthly payment.
Consider This Before Making a Lease Down Payment
Even though you can make a down payment on a lease, a cap cost reduction isn’t always a good idea. A lower monthly payment may sound like a sweet deal, but consider this: what happens if your leased vehicle is stolen or totaled shortly after you get it?
Cap cost reductions are nonrefundable, so if you overpay upfront, you’re not getting any of that money back if something happens to the car. Not to mention, since you don’t own it, any money from insurance coverage goes directly to the lessor, not to you.
The Bottom Line
When you’re choosing a lease deal, deciding to make a down payment can help you keep your monthly payment affordable, but it’s a good idea not to overspend on the up-front costs. If you find yourself wishing to break the never-ending cycle of lease payments, it might be time to consider a car loan.
Auto loans can happen even for people who are struggling with tarnished credit situations, and CarsDirect can help. We work with an expansive network of special finance dealerships that have the lending resources to help consumers get the financing they need in many different situations.
Our process is fast and free, plus there’s never any obligation to buy. To see how we can help you get matched with a dealer in your area, fill out our car loan request form today!
FAQs
A Down Payment Doesn't Lower the Lease Price
Should you put money down when leasing a car? ›
Making a down payment on a lease is a personal decision. You may be more comfortable putting money down to get to a comfortable monthly payment, or you may prefer to keep your cash and write a bigger check each month. There is no wrong or right answer.
What is the 1 rule in car leasing? ›
When researching the different aspects of a lease deal, you'll come across the “one percent rule.” This method is intended to be used for a 36 month lease and 12,000 mileage allowance and divides the monthly payment you will be making for the lease (without taxes) by the MSRP. A good lease deal will be 1% or lower.
How much money should I have saved to lease a car? ›
Paying too much money upfront
You'd be out of a car, and that upfront money you handed over to the leasing company would essentially disappear. It's recommended you spend no more than about $2,000 upfront when you lease a car.
Is it financially smarter to lease a car? ›
It Might Not Save You Money
Yes, you can sign a long-term lease, but that may negate the monetary benefits of leasing instead of buying a car. That's because leasing typically costs you more than what you might have taken out in a long-term car loan.
What are three cons of leasing a car? ›
Unfortunately, leases come with restrictions and other drawbacks worth considering before signing on the dotted line.
- Mileage restrictions. Most leases come with annual mileage restrictions, typically ranging between 10,000 to 15,000 miles. ...
- Additional costs. ...
- Difficult to exit lease. ...
- You won't own it at the end.
Most new models are introduced between July and October, so this is the time that you should try to lease to maximize your savings. 2) Holidays: Lease shoppers can find special dealership incentives during long holiday weekends, including President's Day, Memorial Day, July 4, Labor Day, and Thanksgiving.
What is the 90% rule in leasing? ›
The lessee has the option to buy the asset at the end of the lease term at a bargain purchase price that is below the fair market value. The lessee gains ownership at the end of the lease period. The present value of lease payments must be greater than 90% of the asset's fair market value.
What does Suze Orman say about leasing a car? ›
But according to personal finance expert and New York Times bestselling author Suze Orman, you should never lease one. “Leasing a car is the biggest waste of money out there. You only get to drive at 12,000 miles. You have to have a lease gap insurance.
What is the 90% lease rule? ›
the lease must contain a bargain purchase option for a price less than the market value of an asset. the lessee must gain ownership at the end of the lease period. the present value of lease payments must be greater than 90% of the asset's market value.
24-month leases may offer additional flexibility, but most shoppers will find they cost a lot more money when it comes to monthly payments. If your priority is monthly affordability and getting more for your money, you'll probably find a 36-month contract to be a smarter choice.
What credit score is needed to lease a car? ›
A score between 620 and 679 is near ideal and a score between 680 and 739 is considered ideal by most automotive dealerships. If you have a score above 680, you are likely to receive appealing lease offers. However, if your score is below 660, you still have a 22 percent chance of earning acceptance.
What is a good mileage for a lease? ›
How many miles per year is good for a lease? Most dealerships and leasing companies advertise between 10,000 and 15,000 miles annually. However, some companies offer high-mileage leases with upwards of 30,000 annual miles. You'll pay less for a short-term car lease with a lower annual mileage limit.
Is putting money down on a lease bad? ›
If you're leasing a car with a high selling price and a high money factor, you may be better off putting money down up front. But if you're leasing a moderately priced car with special incentives and low rates, beginning the lease with little or no money down may work for you.
Who benefits most from leasing a car? ›
Leasing can be attractive if you're looking for lower monthly costs, want a new car with new car technology every few years, and don't want to worry about certain tasks, such as selling your car. Leasing can also put you into a luxury model that otherwise might be out of reach.
Is it wasteful to lease a car? ›
Additionally, leased vehicles don't typically retain equity when you lease, what you owe on the car only catches up to its value at the end of a lease. This could be viewed as a waste of money by some since you're not in an equity position at lease end.
Is it better to lease a car for 24 or 36 months? ›
24-month leases may offer additional flexibility, but most shoppers will find they cost a lot more money when it comes to monthly payments. If your priority is monthly affordability and getting more for your money, you'll probably find a 36-month contract to be a smarter choice.
Is $2000 a good down payment on a car? ›
If you're considering a car that costs $25,000, putting down between $2,000 and $4,000 would be wise. However, the true answer to this question depends on your negotiation strategy. If you can negotiate a lower price or better terms, putting more money down may not save you much interest.
Is it better to lease a car or pay it off? ›
In the short term, it's generally cheaper to lease a car due to less stringent down payment requirements, lower monthly payments and minimal maintenance and repair costs. In the long run, however, you may be able to save more by buying a car because you'll retain all the equity you build as you pay down the loan.
Should you put money down on a car? ›
Down payments reduce the amount of money you must borrow and, thus, the interest you pay while repaying your car loan. Experts recommend a down payment of at least 20 percent. Larger down payments may prevent becoming upside-down on your loan.
