Recently, we had Dr. Laura Schlessinger on the nationally syndicated Car Pro Show. She had recently purchased a new Dodge Challenger and during the interview it came out that she had done a pre-paid lease. In her case, she sold her old car for enough money to completely pay her lease in advance. Many people called to find out how these work so I decided to explain it here.
Pre-paid leases are sometimes called single-payment leases too, and it is primarily for people who have a good amount of cash. This plan works very similar to a regular lease, but you make all the payments up front in a lump sum, and often you save a substantial sum of money on interest charges since you are paying in advance.
Like a regular lease, you still have to adhere to the rules of wear & tear, and you have to stay within the mileage limits since at the end of the lease, you may end up turning the car back and walking away from the vehicle if there is no equity. If there is equity in the car at the end of the lease, you can trade it in or purchase it, just like a regular lease.
If you are in the enviable position of having enough cash to pre-pay your lease, you eliminate the hassles of making monthly payments. Another advantage is that most captive lease companies (Ford Credit, Honda Financial, etc.) offer GAP insurance coverage on their pre-paid leases, which gives you another layer of protection.
Like regular leases, you can choose the mileage you want. 15,000 miles per year is standard, but you can go lower or higher as needed, but know that this will have an effect on the amount of the upfront payment. As with any lease, be sure of the annual mileage needed before you go to the dealership.
Normally, within 3 months of the end of your pre-paid lease, you will be contacted to find out what your intentions are at the end of the lease. This is a good time to get your vehicle appraised to see what the true value of it is to help you make a good decision on what to do.
I would suggest that anyone interested in a pre-paid lease also look at a normal lease to see how it compares, and to make sure that paying all the payments up front actually results in a savings for you. Given that your money sitting in the bank only pays you a very minimal return, pre-paying your lease may end up with savings for you.
In summary, the advantages to doing a pre-paid lease are 1). A much lower cash outlay than paying cash for the total amount of the car, 2). You avoid the hassles of making a monthly payment, and 3). You have a lot of options at the end of the lease-like purchasing the car, or walking away and getting something new.
Like regular leases, pre-paid leases are not for everyone, but for some people, like Dr. Laura, it is a great way to get a car!