Car Pro Advice: Car Leases and Down Payments

Car Pro Advice: Car Leases and Down Payments
Car leases & down payments
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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. Let�s 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 doesn�t 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.