Should You Make a Down Payment On A Car Lease?

When you lease a car, you’re paying a dealership for the car’s depreciation during the lease term. Your lease agreement incorporates depreciation as the difference between the selling price and the residual value. You can get some of the best car leasing deals by negotiating the selling price, but the residual value is often non-negotiable. 

Dealerships split up the depreciation across your lease terms (typically expressed in months) to determine your monthly payment. However, the lease money factor determines how much you pay in interest to lease the car. A lower money factor results in less interest paid over the lease term. 

A down payment comes into play on a lease in several ways. Some dealerships may be willing to negotiate a lower money factor if you put money down to reduce your overall credit risk. In addition, down payments can reduce your monthly payment by front-loading your costs. However, you still pay the same amount over the lease term, whether you put $0 or $5,000 down upfront. 

Most dealerships don’t require you to put any money down on a lease. Indeed, you can lease a car with no money down. However, if you want to lease a car with bad credit, some dealerships may require a down payment as a sign of commitment. Remember that down payments are non-refundable, even if your lease is stolen or involved in an accident. 

Conventional wisdom suggests that putting money down on a car loan can help reduce the interest you pay over the life of the loan. However, you don’t own anything at the end of a lease, so your down payment doesn’t go toward building equity in the car. Instead, down payments are applied to the cost of the lease to lower your monthly payment, but not the overall cost. 

Many lessees use the money for a down payment to cover the amount due at signing. You can typically cover taxes, titling, licensing, registration, and dealership fees with the money you would otherwise use for a down payment. Rebates can also lower the car's selling price, which decreases the depreciation you pay. 

Other upfront leasing costs

Leases typically require the following upfront costs, depending on your lease agreement: 

• Security deposit: Lease agreements often stipulate a security deposit that helps reduce any liability on the dealership should you return your leased car with dents, dings, scratches, or other significant damage. 
• Acquisition fee: This fee describes the amount the dealership paid to acquire the vehicle.
• Dealership add-ons: If you choose any type of vehicle service contract, such as an extended warranty, the dealership may charge you for it upfront or roll it into your monthly payments. 
• Documentation fees: You must pay the dealership to title, register, and license your lease.
• Sales tax: The exact sales tax you owe depends on your location. 
• Insurance: You must have insurance coverage before you can drive your lease. Including gap insurance in your coverage in the event of theft or an accident is prudent.

Some of these expenses represent car lease fees to avoid, such as dealership add-ons. However, additional leasing costs include those the dealership can tack on after you return your lease. These include: 

• Disposition fee: Dealerships charge lessees to inspect and clean their returned leases, with most disposition fees ranging from a few hundred dollars to around $1,000. 
• Lease penalties: You’re on the hook for excessive wear and tear, mileage, and any other damage to the lease.
• Early termination: If you terminate the lease early, the dealership will assess fees accordingly. You may be liable for the remaining lease payments, depending on when you terminate. 

Most leasing companies will deduct any penalties from your security deposit. However, should your costs exceed the security deposit amount, you’ll owe the difference. 

The role a down payment plays in determining your monthly lease payment can be broken down into the following statement: the more you put down, the less you’ll pay monthly for your lease. Many industry experts argue for putting as much down as possible on a car loan, but the same can’t be said for a lease. Putting down a large chunk of change on a lease has its drawbacks. 

For example, if your leased car were stolen or involved in an accident where the insurance company totaled it, you would still be liable for your lease payments. Gap insurance covers this expense in these cases, but you’re still without a car. Plus, you don’t get back your down payment, summing up quite a few of the 10 reasons not to lease a car. 

Even putting the entire value of your trade-in down as a payment on your lease can be a mistake. Again, you’ll lose every penny if the car is totaled or written off as a loss. Instead of putting the entire trade-in value down, use those funds to cover your expenses due at signing only. The dealership can cut you a check for the difference. 

To illustrate the power of a lease down payment, consider the following scenario: 

• You have $3,000 to put down on a lease, potentially
• You have $10,000 in credit card debt 
• You negotiate a lease on a Jeep Grand Cherokee with a $550 monthly payment, a 0.0035 money factor (8.4% APR), and 36-month terms

Leasing this Jeep will cost you $19,800 (plus additional applicable fees) over the life of the lease based on a money factor of 0.0035. However, putting $3,000 down on the lease decreases your monthly payments from $550 to $467. That’s nearly a $100 difference for putting $3,000 down upfront. 

However, consider your $10,000 credit card debt, which is likely subject to a 20% APR. Minimum payments on this debt hover around $200 monthly. If you reduced your credit card debt by $3,000, those payments would drop to $140 monthly, a savings of $60 monthly or nearly $2,200 over the same length as your lease (36 months). 

Comparing the two interest rates can help identify where to spend your money best. Committing to a fixed 8.4% APR for 36 months is more affordable than a 20% APR standard on most credit card balances. In addition, lowering your debts can improve your credit utilization and score. 

Each situation will vary based on your circumstances, but it’s often better to put the money you have for a down payment to work elsewhere. It takes looking at the bigger picture to identify those opportunities and maximize their potential. Consider this before you put down any money on your next lease. 

If leasing is not the best choice right now, consider a FINN car subscription. FINN makes choosing the car you want convenient, right down to the make, model, trim, and color. FINN’s team will even deliver your car to your door. Learn more about how it works, including subscribing to a car without worrying about any down payments.