Less Is More in Car Lease Downpayments

NEW YORK (MainStreet) — It's as counterintuitive as personal finance gets, admitted Justin Sisley, who runs theautoleaseguy.com. But the more money you put down on a car lease, the bigger sucker you are.

That's exactly contrary to buying a car where pretty much every advisor nowadays suggests going big on the down, to get the monthly note payment lower and also because, frankly, returns on cash are so anemic, it may be wiser to reduce interest payments.

That logic falls flat on its face with car leases, however. There's even a killer argument that shuts the door on putting down extra money on a lease.

For starters, understand that leasing a car is fundamentally different from buying. In the latter you are in fact acquiring a tangible asset, a car.

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With a lease, you are paying as you go for use of a car. Big difference. Said Jason Lancaster of AccurateAutoAdvice.com: "You're not buying a car, so you're not locking yourself into years of payments and/or a giant capital cost."

He added: "The main benefits of vehicle leasing are mostly a) conserving capital and b) maximizing cash flow."

Put down a lot of cash, and you just vaporized those benefits.

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Jordan Perch, an analyst at DMV.com, said similar: "Considering that one of the main goals of leasing a car is spending as little cash as possible, putting a lot of money on a down payment is not recommended. Generally speaking, it's better to make the payment that was determined by the dealer, without exceeding that amount."

Do the math and, in most cases, a lease lets a driver get into a more luxe car with less money involved. Yes, with a lease no equity is built up. But also with a lease you only pay for what you use, as you go.

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That's why a lease may involve costs that are half what it cost to buy the same car. Lease a Toyota Prius 5 and the terms are $229 per month for 24 months, with $2,779 due at signing.

That same Prius 5, purchased, runs around $28,000. There's a 0% APR special, available for as long as 60 months. And with $2,800 down, the monthly note is around $470. Note: when the car is paid off, it's a beat up five-year-old vehicle and, yes, you own it outright. So what?

With leasing, you get a new car every couple years. What's not to like about this program of capital conservation?

Then, too, there is that killer argument - little understood outside the circles of car leasing experts. A.J. Smith, managing editor at financial advice site SmartAsset, elaborated: "The negative side to a higher down payment is that if something happened to the car - if it's stolen or totaled - the insurance company would pay the leasing company. The amount of the down payment would simply be lost. And you would have no car."

Read that frightening sentence again.

Say you covet a $42,000 Range Rover Evoque. It rolls in a 36 month lease with $2,995 down, plus taxes, title, license and fees. $0 security deposit. The monthly payment is $429.

Expert after expert stressed: stick with that amount, don't go a dime higher on the downpayment.

If you put down an extra $5,000 on a leased Evoque to get the monthly payment down to $350 and if on the way home from the dealer lot you are in a horrific accident and the car is totaled, guess what? You just lost $5,000.

If yours is conventional car insurance, it would pay off the leaseholder in full - you owe nothing. That's the good news.

The bad news is that extra $5,000 is gone.

And there's nothing you can do about it.

That is the single most powerful argument for never putting down more than the minimum.

Unless of course yours is a special case.

Sometimes in fact it may make sense to up the down a mite. Kevin Amerson in West Hollywood had his eye on a BMW 428i - which starts at around $40,000 -- but he did not want to go over $450 per month for the car note, to keep his personal budget in harmony.

He wound up throwing down an extra $1,000 to hit that $450 mark and, in that case, doing so makes perfect sense, because it left the buyer in his comfort zone.

That's key: stay in your comfort zone but know that, in most instances, the smart move is to put down the least possible on a lease. It's counterintuitive but it's the smart money move.

--Written by Robert McGarvey for MainStreet

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