Whether you're talking about leasing or financing a car, a down payment isn't refundable. In leasing, a down payment is referred to as a cap cost reduction, and it lowers the amount of your loan by reducing the capitalized cost and the amount being financed. A down payment isn't always necessary or wise when leasing, so let's take a closer look.

Why Not to Pay Up Front on a Lease

Because a cap cost reduction is essentially a pre-payment of your lease, we don’t recommended doing this. The reason for this is that if something were to happen to the vehicle after only a few weeks or months, you won’t get the down payment back. In a way, you've paid more than needed for a car you no longer have. You also won’t be reimbursed for the value of the vehicle – the insurance settlement goes to the leasing company. In other words, you're out a car and any money you’ve already paid.

When leasing, you're required to pay certain charges at signing. These charges typically include any inception fee, the title and registration fee, and the first month's payment, which shouldn't be confused with a down payment. These charges, including a down payment, aren’t refundable, although a security deposit may be, if one is required. A security deposit is an additional charge that's generally held by the leasing company to cover repairs needed from excess wear and tear when a vehicle is turned in at lease end.

Not only do you have to understand different types of charges and deposits due straight, there are also a number of terms used that are unique to leasing, and it's important to know them before you lease a car.

Lease Terminology You Should Know

Is a Car Lease Down Payment Refundable?There are a lot of words thrown around when you're leasing a vehicle that don't come up anywhere else, and they can be a bit confusing. Let's take a look at the basic terminology of an auto lease:

  • Capitalized Cost – The "cap cost" is the selling price of the car plus any inception fees. Typically, the lower the cap cost, the lower your monthly payment is.
  • Cap Cost Reduction – This is a down payment in leasing and it lowers the capitalized cost of the vehicle. The more money you put down, the lower the amount being financed. What you're doing is pre-paying your lease, since taxes are subtracted from the down payment before the capitalized cost is reduced. Though a down payment is sometimes required, we don’t recommended making one. If something were to happen to the car before the lease is complete, the down payment isn't refunded to you.
  • Residual Value – This is the estimated value of the vehicle at the end of the lease term. Based on depreciation, the difference between the cap cost and residual value divided by the number of months in your lease determines the amount of your monthly payment.
  • Money Factor – The money factor, sometimes called the lease factor, is the cost to finance. The money factor is a very small number always expressed as a decimal: .00275, for example. It's comparable to an interest rate, but not the same. In order to determine your annual percentage rate (APR), you have to multiply the money factor by 2,400. In the case of the example, the APR on your lease would be 6.6 percent.
  • Lease Term – This is the number of months you lease the car, typically 12 to 36 months. The average lease term is meant to be short, which helps keep the cost low, because you're only paying for that portion of the vehicle you’re using.
  • Inception and Disposition Fees – These are fees charged at the beginning and end of the lease, respectively. Inception fees are due at the time of signing and may include an acquisition fee (a leasing company fee to start the lease), the first month's payment, any cap cost reduction, taxes on the cap cost reduction, license, title, and registration fees, and possibly a security deposit. A disposition fee is charged at the end of a lease and typically covers the lessor’s cost for cleaning and resale preparation.
  • Security Deposit – A security deposit is rarely required. It differs from both a cap cost reduction and the payment due at signing. If a security deposit is needed, it typically covers the cost of repairs and excess wear and tear at the end of lease. Any unused amount is refunded to the lessee.
  • Lessee and Lessor – When you're leasing a car, you're called a lessee. The leasing company is the lessor.

Ready to Find a Car?

Now that you know the terminology of leasing, and why a down payment doesn’t make sense, it's time to determine if leasing is right for you. Though it can be a great way to get a new vehicle with an affordable monthly payment, it's typically easiest to lease when you have stellar credit. Consumers with low credit scores hoping to lease may find themselves out of luck.

But, just because you may not qualify for leasing doesn't mean you should give up on your search for a car. People struggling with poor credit can still get the new vehicle they need, they just have to know where to go. Here at Auto Credit Express, we can help with that.

We work with a nationwide network of special finance dealerships that have lending resources available to finance people who have bad credit, no credit, and even bankruptcy. Don't delay any longer, simply fill out our auto loan request form, and we'll start the process of matching you to a local dealer!