Should You Make a Down Payment When You Lease? | Edmunds

Should You Make a Down Payment When You Lease?

The Smart Play May Be the Smallest Possible Down Payment


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.

A quick refresher on how a lease works may help explain why this is so. (Read more in-depth information on leasing, how to calculate a lease or how to lease a car.)

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.)

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:

1. 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:

1. 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.
2. 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.
4. 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 Down Payment 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 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:

1. 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 and 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.

2. If your goal is to minimize paying interest on money you borrow, you can 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.

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


To find a dealership that knows how to treat shoppers right, please visit Edmunds.com's Dealer Ratings and Reviews.

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