You've heard that leasing offers an excellent way to get into a new car with lower monthly payments than you'd have to pay if you purchased. Often, you’ll see lease deals advertised with no money down, and sometimes those offers seem too good to be true.
Are those lease deals real? What is their total cost? Should you pursue a zero-down lease deal?
Many experts say you should. Read on to find out why.
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How Zero Money Down Lease Programs Work
Yes, zero-down lease deals do exist, but that doesn’t mean that you can go to the dealer with empty pockets and drive away with a new car. You’ll still have to pay fees, sales tax, and usually your first month’s payment.
To understand how lease deals with no down payment are put together, let’s start with a reminder of how leasing works. When you purchase a car, you pay the entire negotiated price of the car, and if it is financed, you'll pay interest charges on top of the money that you borrow.
When you lease a car, you only pay for the depreciation that occurs during the term of the contract, plus some fees and interest (called the money factor in the leasing world). Experts evaluate what they think the car will be worth at the end of the contract, based on its expected depreciation. The number they come up with is called the residual value.
To figure out the monthly payment, you take the negotiated price of the car (called the capitalized cost or cap cost) and subtract the residual. Divide that number by the number of months in the lease contract, add in the money factor (interest), and you have the monthly payment.
Of course, there also are likely to be some fees that will add a few dollars to each month’s payment. In many states, you only have to pay sales tax on the lease down payments, monthly payments, and fees. That’s a huge benefit over buying a car, where you have to pay sales tax on the entire purchase price.
Downsides of Zero Down Leases
When you make a down payment on a lease, it is called a cap cost reduction. Because it lowers the total amount of money financed over the lease term, it lowers each month’s payment.
Think of it as a teeter-totter. Raise the down payment, and you'll reduce the monthly payment. Lower the down payment to zero, and you'll have to finance the entire difference between the capitalized cost and the residual. Since you’re paying interest on that money, you’ll likely pay more in total costs over the term of the contract.
Here’s an example. You’ve found the perfect SUV, and you've negotiated a $40,000 price. Its residual value is $25,000, so if you get a zero-down lease offer, you'll finance the remaining $15,000 in equal monthly payments that include interest and fees over the lease's 36-month term. If you pay $3,000 at lease signing, you’ll only be paying $12,000 over the term of the lease, plus fees and interest, so the monthly payments will be lower.
Because you will be financing more in a zero down lease, there’s more risk of loss to the leasing company if you default. Typical zero money down leases will only be offered to customers with a top-notch or “Tier 1” credit score.
While we’re on the subject of lowering your monthly payments, one of your most powerful tools in your leasing arsenal is negotiating down the capitalized cost of the car. It’s a common misconception that you have to pay sticker price, or MSRP, when you lease, but that’s simply not true. You want to negotiate the price of the car for a lease just as you would if you were buying it.
Benefits of a No Money Down Lease
Though you likely will end up paying more due to interest costs, many experts suggest a zero down lease is the best way to structure a deal.
During the term of the lease, title to the vehicle is held by a leasing company. If you should total the car or it gets stolen during the lease, any insurance payments will be made to the titleholder, not you, and the lease contract terminates. The thousands of dollars that you paid up front will be lost forever, even if you’ve just driven a mile off the lot and have great gap insurance that ensures that you don’t lose any money out of pocket when the accident occurs.
In many states, lessees pay sales tax on any money they put down. With a no money down lease, you'll pay the same amount of taxes, but you'll pay them at a much slower rate. In some cases, you can roll all of the fees into the lease, and pay them off at a slower pace as well. Of course, you'll pay more in total, as you'll be paying interest on everything included in the lease.
How Can You Get a Zero Down Lease?
Though car dealers might not be open about it, nearly every component of a car lease is negotiable. The only number that is usually fixed is the residual value, which is set by the leasing company that will hold title to the car.
The price of the car is the most critical component to negotiate; some experts suggest that you avoid telling the dealer you intend to lease until you have agreed to a purchase price on paper. Leases can be very confusing, and that’s to the dealer’s advantage, not yours. Whatever you do, don’t allow your trade-in to become part of the lease negotiation, as doing so will create further confusion that is not to your benefit.
If a dealer offers you a lease deal with a substantial down payment, ask for an option with no money down. Be sure to get it in writing with all of the contract’s components listed, including cap cost, monthly payment, fees, residual, the money factor, the allowable mileage, and any cap cost reductions (there should be none on a zero-down lease).
It might sound silly, but make sure the offer is on a car that the dealership has in stock or can easily get from another dealer’s inventory. Any offer is worthless if it is not tied to a specific car.
Take that offer and shop it to multiple dealers. Unless a salesperson knows that they are competing for your business, they won’t have any incentive to find you a great deal. It’s their job to make the most money that they can on the deal, and there’s nothing wrong with that as long as they act ethically and legally. It’s your job to get the best deal you can. As always, your greatest power is to walk away from one that’s not friendly to your wallet.