Leasing a Car: Should You Put Money Down?
Understanding Capitalized Cost Reductions
Leasing a car can be a complex process, and one of the most important decisions you'll make is whether to put money down or not. The term 'down payment' is often misleading, as it is technically a 'capitalized cost reduction.' This reduces your monthly payments but doesn't affect the lease end value of the vehicle.In my experience as a Toyota salesman, I leased a 2000 Tacoma, 4 cylinder, 5-speed, 4-wheel drive regular cab. I put down $1600 in cash, had a trade-in of $300, and paid for gap insurance in cash. The monthly payments were $200, which was exactly what I was aiming for. Understanding how the process works can really benefit you, don't listen to a friend who might give you conflicting advice.
Strategy if You Have Perfect Credit
If you have perfect credit, it might be in your best interest to negotiate a higher monthly payment. For example, if the monthly payment is $299 with a $2500 down payment for 36 months, you can calculate the total interest costs over the lease term. Divide $2500 by 36, which is approximately $69.44, and add it to the $299 monthly payment. You end up with a payment of $368.44. If the dealership agrees to this, great. If not, they may offer you gap insurance.Buying gap insurance through a dealership can cost twice as much as buying it through your car insurance company. Call your car insurance provider to get a quote before you go to the dealership.
The Only Number You Should Focus On
When leasing a car, the most important number to focus on is the total outlay over the entire term of the lease. How you spread this out is a matter of how much cash you have in hand, maybe from a trade-in, and your tolerance for a monthly payment. Pay close attention to the various fees that may be added.The Trick They Use
Be wary of the 'down payment' trap. While the down payment does reduce your monthly payments, at lease end, you're left with no equity in the car, as if you never made a down payment. This is a common strategy used by car dealerships to make the lease seem more attractive.The only reason to put money down is if you're trying to trick yourself into thinking your monthly payment is less than what it actually is. In the grand scheme of things, the amount of money you save per month is minimal. If a car is priced at $40,000, it still needs to be financed, regardless of the down payment. By putting down $2000, the interest is factored in on $38,000 instead of $40,000. This is still a new car at a preferred rate, not a used car with higher rates. Keeping your money out of the deal is often a better strategy.