The decision of whether to lease or buy a car depends on a number of factors. Leasing a car may be a feasible option for a person who has a fairly good credit score, but lacks the necessary resources for making a down payment on the car loan.
In this scenario, leasing is prudent assuming that one would like to lease a car for a period of three years or so and plans to rack up no more than 12,000 miles annually. People, with fairly decent credit scores, can lease a car with no money down. This is possible on account of the following reasons.
Can You Lease a Car with No Money Down?
This question can be answered by analyzing the individual cost components that make up the total amount that is due to a lessor once the lessee signs the contract.
The amount that is due-at-signing is popularly referred to as drive-off fee. Drive-off fees generally include the following:
- Security Deposit
- Documentation Fees
- State Registration Fees
- First month's Lease Payment
- Sales Tax
- Acquisition Fee or Bank Fee or Assignment Fee
In most states, sales tax is added to the cost of the lease and is repaid in monthly installments. However, a few states may allow the lessor/dealer to charge the entire amount of sales tax up-front. Acquisition fee is a non-negotiable administrative expense that is charged by the leasing company and is directly proportional to the cost of the vehicle.
This fee may be paid up-front, as a part of the drive-off fee, or it may be capitalized and paid in monthly installments. If the sales tax and the acquisition cost is not paid up-front (included in drive off fees) it is included as a part of the capitalized cost of the vehicle.
The total amount that is being financed with a lease, is referred to as the gross capitalized cost (cap cost). Gross capitalized cost refers to the worth of the vehicle and add-on charges, as agreed upon by the lessor and the lessee, and may include unpaid sales tax and acquisition fee.
If the lessee chooses not to make a down payment at the time of lease inception, the difference between the gross capitalized amount and the residual value of the car, at the end of the contract, is estimated. This difference gives the amount of depreciation that is expected over the term of the contract.
If the lessee decides to make a down payment, the amount is subtracted from the gross capitalized amount to arrive at the net capitalized cost. The difference between the net capitalized cost and the residual value of the car, at the end of the lease, gives the amount of depreciation, which is less than the depreciation calculated in the previous case. This in turn results in lower monthly payments, since the depreciable value or the financed value is lesser than the value arrived at in the previous case.
This down payment is referred to as cap cost reduction and it is voluntary for a person with good credit scores. People with bad credit may be required to make a down payment. It may also be necessary in case of specific promotional offers. The biggest advantage of leasing by making a down payment, is that the monthly payments become less. This is because the total amount that is financed with a lease becomes less on account of up-front cash payment.
Leasing a Car with No Money Down
A person, who is interested in leasing a car, will be required to fill out a credit application. A poor credit score will make it difficult, if not impossible, to enter into a favorable lease agreement, since the terms of the contract are structured on the basis of a person's credit score. Upon expiration of the contract, one has the option of returning the car or purchasing it for the residual price that is quoted in the original contract.
Hopefully, the above article would have answered the queries:
- How do you lease a car?
- Can you lease a car with no money down?
The available auto financing options should be carefully assessed to determine the appropriate course of action. One must bear in mind that if one racks up more than the allowed miles or if the lessor feels that the car has suffered substantial wear and tear, one would have to pay additional fees, as deemed appropriate.