Car Pro Advice: Car Leases and Down Payments

Car leases & down payments
Image credit: Supertrooper/
Something I said on the Car Pro Show recently spurred a lot of questions about putting money down on leases. I soon realized this was an area of confusion for many people.

If you do a conventional purchase of an automobile, I recommend putting as much of a down payment or trade equity as you can. This lowers the monthly payment and cuts down on interest charges. However, the scenario is very different with a lease.

While cash or trade equity on a lease does lower the monthly payment, it does nothing to help at the end of the lease. Letís look at this example of two ways to lease the exact same vehicle: a $50,000 MSRP with a $45,000 price after incentives, 36 months, 12,000 miles per year, residual value of 55%, (which is $27,500) and a money factor of .00012 (2.9% APR):

  • #1. This customer doesnít put a penny down, no tax, title, and license, nothing. The payment calculation shows that he or she will have a monthly lease payment of $719.
  • #2. This customer has the same terms, same vehicle, but decides to put $5,000 down to lower the payment down to $574, a monthly savings of $145 per month.

36 months later, the end of the lease comes, and both customers have a residual value of $27,500 that has to be dealt with. They are both in exactly the same position. The $5,000 paid by customer #2 is gone completely. He or she paid $5,220 less in monthly payments than customer #1 did, but the $5,000 vanished.

Know that it is OK to put money down on a lease as long as you understand that all you are doing is artificially buying down your monthly payment, not building equity. Too often people think down payment on a lease helps build equity at lease-end and nothing could be farther from the truth.

My recommendation is to put down the tax, title, and license only. This is optional and a personal decision. No down payment can be arranged on every lease, especially for those people who have good credit. Personally, I prefer not to pay interest on a tax, therefore, I put the tax, title, and license down.

If you have a trade-in that has a clear title or that has equity, think of that as cash since that is what it is. If you have a clear title to your trade-in, take out the amount you want to put down and have the dealership write you a check for the rest. If you have equity but also a balance owed on your trade-in, the dealership will write a check to your lender for the amount owed and another check to you for your equity.

As a side note, if you are curious about the money factor I spoke of earlier, this is a term for interest rate on your lease. If you are looking at a lease worksheet and want to convert the money factor to an APR percentage, simply multiply the money factor by 2400.

Making a down payment on a lease is a personal decision. You may be more comfortable putting money down to get to a comfortable monthly payment. Or you may prefer to keep your cash and write a bigger check each month. There is no wrong or right answer. Just understand the residual value at the end of the lease is going to be the same.

To understand more about leasing, we have a leasing section that will help you at our FAQ page.
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Bob Weaver
I read your advice on putting down money on leasing. I didn't see any mention about the fact that is some states, including California, the license fees [including registration] and sales tax on the first payment are not optional. Sales tax is paid on a monthly basis.
The Car Pro
Bob, I donít get specific since these articles are read by people around America, not just California.

Jerry Reynolds
Your advice on putting down money on leasing. The guy that puts 5k down is basically buying down the lease payments. His payments went down 145.00 a month. Take that 145 times 36 months is 5220. so #1 paid higher payments and #2 paid lower payments but put more down. They basically paid the same amount of money. Pay me now or pay me later.
Pat Crven
The Car Pro
Agree. The point of the article is that you are artificially lowering your payment, which is fine if thatís what you want to do.

Jerry Reynolds
I find the most disturbing part about the lease deal described above is that over the 36 month lease period, the buyer will pay appx $26K in total payments. Yet the difference between purchase price $45,000 and residual price $27,500 is only $17,500. What happened to "pay for only the part of the car you use" as some sellers advertise? In your example, the buyer pays ~1.5x the depreciation.
The Car Pro
There is depreciation with every vehicle, whether you lease or buy. With a Toyota, there is a good chance youíll have equity at the end, or even at 2/3rd of the way through a lease. That changes everything.

Jerry Reynolds
Jerry, my question is concerning my 2018 lease. I have 16 payments remaining, but the dealer is now offering me a new 2020 model and $80+ less per month payment if I turn it in for the new one. Is this for real?
The Car Pro
Certainly worth looking at numbers. I suspect it is just way to get you back in, but the used market is super high, Iíd pursue it.

Jerry Reynolds