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
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.
Is it wise to put money down on a lease? ›
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.
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.
Does a car lease help or hurt your credit? ›
If you're approved for your lease, you can use it as an opportunity to boost your credit score, which could give you more leverage when it comes time to upgrade. Just make sure to stay on top of your payments. Lease payments are reported to the major credit bureaus the same way finance payments are.
What are the disadvantages of a large down payment on a car? ›
What Are the Disadvantages of a Large Down Payment? Providing more money down doesn't guarantee a lower interest rate, and it can cut into your savings.
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.
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's a good money factor for a lease? ›
Generally, a money factor of 0.0025 and below (the equivalent of 6% APR) is considered a good rate. So how do you get a good interest rate when you lease a vehicle? The same way you do when borrowing for any other reason, whether it's buying a home or applying for a personal loan: by having good credit.
What is the effective monthly payment on a car lease? ›
To figure your monthly payments, take the total financed amount of the lease (depreciation, plus taxes, interest, and fees) and divide it by the number of months.
How much should you put down on a $25,000 car? For a $25,000 car, consider putting down at least $2,500 if it's used or at least $5,000 if it's new. By putting 10% or 20% down depending on the car's condition, you'll have the best options for loan terms and interest rates.
What is a realistic down payment for a car? ›
The typical down payment on a car ranges from 11% to 20% of the car's value. The credit bureau Experian says a 20% down payment might help shield you from depreciation. Depreciation refers to the ever-shrinking value of your car.
What is a good down payment for a $20000 car? ›
A down payment between 10 to 20 percent of the vehicle price is the general recommendation. But if you can afford a larger down payment, you can save even more money on interest payments over the life of the loan.
Is it easier to get approved for a lease? ›
If you have a fair or bad credit score, it's often easier to get approved for a car loan than to lease a new vehicle. In either case, making a large down payment or getting a co-signer will help your chances of getting approved.
Can I lease a car with a 500 credit score? ›
Borrowers with credit scores below 600 only accounted for 4.88% of leased cars. Bad credit borrowers don't have the best odds when it comes to getting approved for a vehicle lease, but some do occasionally get the go-ahead. However, with a lower credit score, it usually means paying more for the car.
Is leasing a car worth it? ›
Leasing helps protect you against unanticipated depreciation. If the market value of your car unexpectedly drops, your decision to lease will prove to be a wise financial move. If the leased car holds its value well, you can typically buy it at a good price at the end of the lease and keep it or decide to resell it.
Is it worth putting a down payment on a car? ›
Key takeaways. 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.
Is it a good idea to pay off lease? ›
The bottom line
Only go ahead if you are getting a great deal on both the lease and the payoff amount. If it would be cheaper to buy your car upfront, or if you think you'll want the car for a long time, skip the lease.
Do you lose more money leasing or buying? ›
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.
Is it better to lease or finance? ›
Leasing is usually more affordable than financing. However, buying a car gives you ownership of the vehicle, so you can recoup the money by reselling it later. How often you drive: If you drive often, take long road trips, or have a long commute to work, think twice before getting a lease.
