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I'm thinking of leasing a car - how much (if anything) should I put down?
Best Answer
348 points
Sensei answered one year ago …
EthanR's answer brought up some very important points and I totally agree. However, it is possible (at least up here in Canada where I live) to lease a used car ... pardon me, a "previously owned vehicle". So, bearing that in mind ...
The answer depends on a number of things but, primarily, your cash flow. I'll presume that right now you either are not leasing a car or own it outright. In other words, at this point a car is not a cash drain for you (beyond operating costs, of course.)
Do a monthly budget. How much do you have left at the end of the month? How much of that do you want to save / invest? Whatever is left over is what you can afford to fritter away on what Robert Kiyosaki calls "do-dads" - like cars. So let's call this "the do-dad amount". And remember that once you've committed to the lease payments, that money will not be around for things like vacations so you have to set those priorities as well.
Having said that, find out the answer to these two VITAL questions ...
1. What will the lease payments be with no down payment and how much will it be reduced for each $ 1,000 you deposit?
2. What is the embedded interest rate?
After you know the answer to the first question, you'll be able to figure out how much you have to put down so that the monthly payments are equal to (or less than) the do-dad amount. I think this is the direct answer to your question.
But the second question is probably more important because it impacts whether or not you want to actually do a lease in the first place.
Leasing companies make their money, mainly, by charging you more for the product than they are paying to finance it. (Don't be fooled. The lease company does NOT buy the car outright. One way or another, they're financing it through their banks. They make their money on the spread between what they are charging you and what than they are paying their banker.) So, in every lease there is an interest charge that is embedded in the payments. Find out what that rate is.
Why is this important? Because you may be able to get a better rate by borrowing from your bank directly. Or, as has frequently been the case in recent years, the car company will offer you "financing incentives". With car manufacturers losing money faster than the Fed can print it they're highly motivated to move (read: get rid of) their inventory as quickly as possible and to do so they may offer you 1% or 2% financing. I've even seen advertising that offers 0% financing and no money down! Compare that to the 4 - 6% or more that is likely the embedded cost from the leasing company. That difference could make the car much more affordable - or enable you to buy a "better" model.
Again, the same principle as I've outlined above applies - ensure that the monthly payments do not exceed your do-dad amount.
Once you've done that, it's possible, depending on the "manufacturer's incentive rate", to actually come out ahead without making any down payment. Here's how ...
Suppose you calculate the do-dad amount and determine what you can afford. Forget about making a down payment. Now, you buy the car using the manufacturer's incentive of, say, 1% financing. You'll now take the money you would have used for a down payment and invest it in a very, very, very, very (get the idea?) conservative vehicle (no pun intended) like a CD that pays you, say, 2%. This isn't money you want to put at risk. Had you made the down payment, you'd have "saved" the interest you'd pay to the car company on that amount @ 1%, but you've made 2% on the CD. You're a winner. Not by a fortune for sure but, heck, it's better than a swift kick, right?
After the last payment, you'll own the car, you'll have the CD plus the interest you've earned on it, and you'll have "upped" your credit rating to boot. Not too shabby.
Answers
4075 points
EthanR answered one year ago …
Brad, unless you are leasing for a business, or only need a car for a year or two, I am going to recommend against you leasing a car. Sure, it's nice to have a new car and no repair worries, then just give it back in a few years. But leasing a car is much more expensive, and if you go over the mileage limit, they really sock you on extra charges. And most car dealers will require a down payment. In fact, I was recently reading that fewer companies are leasing cars now, because they are worried about payment defaults.
As an alternative, consider buying a car that is 2-3 years old, and has low mileage. You can get a huge discount to what the car originally sold for, as depreciation is the greatest during the first few years, and the car should still have many good miles ahead of it. Pay cash if possible, rather than financing. You can buy a pretty good car for the same money you will spend on a lease in three years, and after three years, you will still have some value left in the car you buy.
If you read the book, "The Millionaire Next Door", you will see that this is what most millionaires do, because nobody ever became rich by spending a lot of money on a depreciating asset, such as an automobile.
Maybe this wasn't the answer you were looking for, but I just wanted to point these facts out. Good luck.
192 points
seyobnats answered one year ago …
To lease or not very often has to do with your immediate circumstances. The advice of Ethan R and Sansei is appropriate for most people but there may be a time when leasing is the only choice. This was a decision my recently divorced son had to make.
When the proceedings started, he, being a nice guy, gave the newer family car to his wife and he took her older car. During the divorce the lawyers raped the family assets due to a child custody squabble and in the settlement bestowed a major portion of his 401-K on the ex-wife. She also got a very generous alimony for 5 years.He got custody of their 8-year old daughter and kept the house which he was able to just refinance before the bottom dropped out of the mortgage market.
He needed a new car because his ex had badly neglected maintenance on the old one. He had no more liquid assets. Fortunately he found a sympathetic (?) dealer who gave him a good year-end close-out price for the vehicle he wanted and equipped as he wanted. The dealer took the old car as the lease down payment and gave him monthly payments that he could afford. In his case a lease for 2 years was the right answer.
At the end of the lease he can buy the car if he wishes for the lease residual value. This may or may not be a good price for the car at that time but the decision to buy has been postponed until he is not under the same financial pressure as at present.
Only you can decide what fits your circumstances of the moment.
896 points
jillybeansisme answered one year ago …
I empathize with the situation seyobnats outlined; however, I feel it still would be better to purchase a vehicle. His son could have used the same old car as downpayment on a vehicle and financed the rest, or bought a used vehicle from a dealership (or a Hyundai for $6,000). Congratulations to his son, though, for stepping up to the plate and getting custody of his kid. That's the best! Just tell him not to use the daughter as a pawn because it'll bite him in the _ss in the long run and she deserves a childhood. The money will flow back to him eventually.
Read more from jillybeansisme896 points
jillybeansisme answered one year ago …
I empathize with the situation seyobnats outlined; however, I feel it still would be better to purchase a vehicle. His son could have used the same old car as downpayment on a vehicle and financed the rest, or bought a used vehicle from a dealership (or a Hyundai for $6,000). Leasing a vehicle is just lighting a match to money.
Congratulations to his son, though, for stepping up to the plate and getting custody of his kid. That's the best! Just tell him not to use the daughter as a pawn because it'll bite him in the _ss in the long run and she deserves a childhood. The money will flow back to him eventually.
699 points
7million7years answered one year ago …
I'm with EthanR, put down 100% (unless it's for a business)!
Also, do you know that most cars lose 10% to 20% of their value as soon as you drive them off the showroom floor ... let someone else be that dummy and by a slightly-used car rather than new.
I saved $35 on my last car purchase by buying a 6 month old car with only 1,700 miles on the clock.
