When it comes to leasing, you may be wondering if you need a down payment. The simple answer is no, you don’t. But, if you want to put money down either in cash or trade equity, a lender won’t say no to the offer.
Where Does the Down Payment on a Lease Go?
Because the interest is part of the lease payment and it’s not simple interest like a car loan, a down payment isn’t going to lower the overall cost of a lease. Instead, the down payment is considered a cap cost reduction. The capitalized cost includes the vehicle’s price and any inception fees, as well as title and license fees if they’re not paid up front. There are three factors that make up a monthly lease payment: depreciation (which includes the of miles plus any extra miles that you purchase), the money factor (interest rate on a lease), and the monthly taxes.
You can lower the monthly lease payment with a down payment, but, ultimately, you’re not saving any money on the overall cost of the lease. Instead, you’re pre-paying the depreciation and interest charges.
Hidden Lease Fees to Be Aware Of
Just because you choose to not put money down doesn’t mean you’re clear to drive off without paying anything. Sales tax is added to each monthly payment, but you may see these extra fees over and above the money factor and depreciation when you lease:
- Acquisition fee – Amount charged by the leasing company to set up a lease, also called a bank fee. It's usually added to the cap cost and rolled into the monthly payment.
- Security deposit – Not always required, a security deposit is typically the same amount as your monthly lease payment, and is due at signing. Unless you have excessive wear and tear or exceed your mileage limit, you get the security deposit back at the end of the lease.
- Disposition fee – Sometimes called a termination fee, this is what the leasing company charges to transport and sell the vehicle at the end of the lease. If you buy the car after the lease ends, you typically aren’t going to be charged this fee.
- Documentation, title, and license fees – Doc fees vary by dealership, and state title and licensing fees are the same as if you were financing a vehicle.
In addition, you can also expect to pay the first month’s payment at signing. This is because you pay at the beginning of the month instead of the end – like usual when renting. Make sure you’re prepared to make the first month’s lease payment when you sign the contract.
The Bottom Line
You don’t have to make a down payment on a lease. In fact, it’s recommended you don’t. You don’t save in the long run by putting money down, but feel free to do it if you want to lower the monthly payment.
On the other hand, if you’re considering buying a vehicle, but worry your credit is getting in the way, let Auto Credit Express help. We help car buyers find the financing they need by setting them up with local special finance dealerships. Start the process today by filling out our secure and free auto loan request form.