For many people, putting a down payment on a lease may not even be required, but you certainly can do it. It won’t help you save any money in the long run, but it could benefit lessees with bad credit.
Down Payments and Leasing
When you make a down payment on a lease, it’s called a capitalized cost (cap cost) reduction. The only reason for a cap cost reduction is to reduce the monthly payment.
When you make a cap cost reduction, you’re prepaying the total amount of the lease. Unlike an auto loan, where a down payment decreases the amount you borrow and therefore decreases the interest charges and overall cost, a down payment on a lease doesn’t decrease the cost of borrowing.
A money factor in a lease is like a car loan interest rate. But in a lease, it’s already added into the total cost, and therefore factored into your monthly payment. Basically, the total amount you pay for a lease is set ahead of time, so putting money down on it doesn’t reduce that overall cost.
While doing a cap cost reduction doesn’t save you any money, it can help you month to month with your budget, especially if you have bad credit.
Cap Cost Reduction
When you put money down on a lease, it reduces the cap cost, and lowers your monthly payment. Again, it doesn’t change how much you pay overall – it’s simply a prepayment.
The cap cost of a lease includes the selling price of the vehicle plus any fees not paid up front (acquisition fee, dealer fees, and title and license fees). In leasing, you pay for the depreciation of the car (the difference between the cap cost and the residual value), plus any taxes, divided by the number of months in the lease.
When you apply for a lease, your credit is checked and used to determine your eligibility. If you meet the lessor’s requirements, your credit score then determines your money factor. You’re placed in a credit tier depending on your credit score – the better your score, the higher the credit tier and the lower your money factor, generally speaking.
If your credit score puts you in a tier with a higher money factor and your monthly payment is more than you would like, a cap cost reduction might help you. However, if you’re considering putting money down on a lease to help with your chances of approval because you have bad credit, it may not matter.
Bad Credit and Leasing
Leasing is typically for those with good credit scores, usually around 660 or more. If you get approved for a lease with a credit score below this range, one or more security deposits may be required. Every leasing company is different, so be sure to look up your credit score and get your credit reports before you dive into lease shopping.
Many borrowers look into leasing because the monthly payment is usually less than a loan payment. But if you have less than perfect credit, your money factor may not make the monthly lease payment that much cheaper than financing.
If you’re worried about paying more than you’d like for a lease because of your bad credit, auto financing may be a better option. With timely payments on a car loan, you could improve your credit score for future leasing with a better money factor.
Bad Credit and Auto Financing
When you have bad credit, it can be difficult to find a lender that’s willing to work with your situation. We want to help with that.
At The Car Connection, we’re connected with dealerships across the country that work with subprime lenders. Subprime lenders, or bad credit lenders, use more than your credit score to consider you for auto loan approval.
To get started, fill out our free car loan request form. It’s secure, easy, and quick, and we match you to a dealer in your local area that works with bad credit lenders. Let’s get you on the road!