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!
