Thumbs Up, or Thumbs Down?
Whether to put money down on a leased vehicle or not seems to be one of the questions we’re most frequently asked. Really, there is no single correct answer to the question. Like most things having to do with finances, the advice people can find around how to spend money can vary from one source to the next.
Vehicle leases and the “right” way to structure a lease is no different. If you ask around, you’re bound to get more than several “correct” answers varying from the recommendation that you put no money down at all (as in, sign and drive), to recommendations that you put a large sum down so that the lease payments are lower.
The truth is that the answer to the question of putting or not putting money down on a leased vehicle, and how much, is very personal and depends on how each person ‘sees’ money and where their personal financial parameters and ‘comfort zones’ lay.
In dollars and cents, putting money down on a leased vehicle and putting no money down makes very little difference, if any, to an the overall expenditure over the lease term.
Without getting too technical, and for example, a car that leases for $505 per month over the course of a 36 month lease with absolutely nothing to start (truly $0) will run $17,675 over the course of the lease – the total of 35 payments at $403 each. That same car with $3500 spent at lease inception will run $403 per month, yielding a total lease expenditure of $17605 – the total of 35 payments at $403 each, plus the initial $3500. So, spending the $3500 up front and at the beginning of the lease saves a total of $75 over the course of 3 years.
Where does the difference come from? In a lease, the primary costs that you pay for are depreciation and interest. Whether you put money down on a car or not, the total depreciation that you have to pay does not change. It’s fixed. But, you do have to finance that depreciation at an interest rate set by the leasing company. The more money you put down, the less depreciation you are ‘borrowing’ and the less interest you have to pay.
But why so little a difference? For this particular example, the reason for the small gap between the total expenditure in putting or not putting money down is because the interest rate attached to the lease is very low (less than 1%). However, the greater the interest rate attached to the lease, the greater the difference each $1000 put down at the beginning of a lease can make to the overall expenditure. Still, in today’s leasing environment, we almost never see interest rates go any higher than 4%, and even at 4% the ‘total expenditure spread’ isn’t very large. But, putting money down does reduce the monthly payment because you are paying the depreciation of the vehicle ‘down’ at the onset instead of over the course of the lease. Confused? It can be confusing.
At the end of the day, putting money down on a lease really becomes a matter of personal preference. Our general rule of thumb tells us to recommend that if our clients can be comfortable with a lease payment without putting any money down, that they shouldn’t. Their down payment funds are best kept in the bank or invested – working for them and earning interest.
On the other hand, there’s nothing wrong with someone who puts money down so that they have a more palatable monthly payment, if they anticipated the down payment spend and have a certain monthly budget in mind. Using the example above, there are plenty of people who feel far more comfortable ‘forking over’ $3500 to start and having a $403 monthly payment than a $505 monthly payment. Both scenarios are near the same, but they ‘feel’ completely different from one another, and one is not ‘better’ than the other.
Long story, short…there’s no right or wrong when it comes to lease down payments. We do, however, have some baseline recommendations. Those are:
If you can, pay your first month’s payment, tax on that payment, and all of the lease fees up front. Not doing so just means that you are rolling these expenses into the remaining payments due on the lease, with interest.
Don’t put more than $5000 down on a lease. The greater the amount invested at the onset of the lease, the less likely it becomes that the victim of a car theft or total loss will recover those funds.
Leasing can seem very tricky to some, particularly to those who have never leased before. If you have questions, we’ll have or find answers. And, we’re always on your side trying to make sure that whatever decision you make, makes sense for you and your personal circumstances.