Can You Pay Ahead on a Car Lease?

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Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.


, Contributing Writer - May 14, 2020

When you lease, the total amount you pay is already predetermined before you sign on the dotted line. You can pay ahead on a lease, but you’re not saving any money – just paying it ahead of time. To fully explain why down payments or pre-payments on leases won’t save you cash, we go over when paying ahead of time is a good idea.

How Leasing Works and Cap Cost Reductions

Leasing is rather different from auto loans, but we’re here to walk you through the cost of leasing and how the payment is calculated. This way, you can come out the other side with an understanding of what you're paying, and when it makes sense to put money down on a lease.

Now, the base price of leasing largely depends on the car’s expected deprecation (loss of value) during the lease term. When you drive a vehicle, it depreciates – and new cars depreciate rather quickly. Many new vehicles lose around 20% of their value within one year of driving.

Most leases are for terms lasting from 24 to 36 months, and your car will depreciate during this time, leaving it with a residual value. This value is essentially an educated guess on what the leased vehicle will be worth when you return it.

Now, there’s another term you’re going to hear: capitalized cost (or cap cost). This is a combination of a few things: the negotiated selling price of the car, acquisition fee, title and license fees, dealer’s documentation fee, and, possibly, the first monthly payment.

The depreciation is the difference between the cap cost and the vehicle’s residual value. This is what you’re paying for when you lease (not including gas and maintenance). With a lease, you only pay for the time you’re driving it, not the entire value of the car. This is why lease payments are generally less expensive than loan payments.

Another cost in leasing is the money factor, and it’s comparable to the interest rate on auto loans. The better your credit score, the lower the money factor you typically qualify for, since it’s largely determined by your credit score, just like an interest rate. The difference is that with a car loan, interest accrues daily based on the loan balance.

When the cost of a lease is computed, the money factor is included into your lease’s total cost. So, if you want to put cash down, or prepay a lease, it doesn't lower your overall cost. But if you want to lower the monthly payment, pre-paying could help free up some disposable income each month.

Keep in mind that leasing also comes with additional up-front costs such as: the first monthly payment, an acquisition fee, a security deposit if your credit isn’t the best, and title and license fees – costs that can sometimes be rolled into the lease. Having some cash up front to cover these items can lower the monthly payment, as well.

Lowering Your Monthly Lease Payment

If you want a smaller monthly lease payment, you can pay ahead by making a down payment. In auto loans, down payments lower the total amount you’re financing and lower your interest charges, which saves you cash. This is why down payments are highly recommended when you're taking out a car loan – there are lots of potential savings. But with leasing, a down payment is something different.

A down payment on a lease is called a cap cost reduction. With a big enough cap cost reduction, you could lower your monthly payment by a lot, since the total cost of the lease is reduced by that amount, with the remainder divided by the number of months in the lease.

Additionally, if you have bad credit, you may be asked to pay one or more security deposits up front. This isn’t required by every leasing company, and if the vehicle is returned at the end of the lease in good shape and under mileage, the security deposit is returned to the lessee.

Paying for a Lease Up Front

In leasing, a cap cost reduction is just a lump sum pre-payment. In some cases, you may even be able to pay for the entire lease up front! If you’re a bad credit borrower, some lessors may even be willing to approve you if you can cover the whole cost.

Paying for an entire lease up front may also persuade the leasing company to put you in a better money factor tier, which could save you some cash, but this isn’t a guarantee.

However, the lump sum is going to be large – usually thousands of dollars. For example, if the monthly lease payment is $250 and the lease is for 36 months, you would have to come up with $9,000 plus the up-front fees.

If you have that much extra cash, it probably makes more financial sense to simply buy a car outright, drive as many miles as you want, with much wear and tear as you please, and sell it later. With a lease, you typically don’t earn any equity and you can’t sell it – your name isn't listed on the title – unless you decide to purchase it at the end of the lease.

Leasing With Bad Credit

Borrowers who think about leasing are usually looking for a new vehicle with a lower monthly payment. However, with bad credit, you may not be saving that much in the long run. Additionally, leasing doesn’t allow you to earn any equity to put toward your next car.

If your credit is less than stellar, you may be better off trying to finance your next vehicle with a loan rather than lease. Not only is leasing typically reserved for good credit borrowers, a lower credit score usually means a higher money factor, and therefore a higher monthly lease payment.

As a bad credit customer, you may find that financing a used car is going to save you more cash – especially if you have a large down payment. Remember, down payments lower your overall cost, and prepaying on an auto loan does save you money while you’re financing. Additionally, a car loan can help improve your credit if you keep up with the payments, which can help you qualify for better lease deals in the future.

If you’re looking for your next vehicle, turn to us at CarsDirect. We’ve created a network of dealerships nationwide, and we connect poor credit borrowers to local dealers that work with subprime lenders. Subprime lending is done through special finance departments that work with borrowers in all types of unique credit situations.

To be matched to a dealership in your area, simply fill out our free and quick auto loan request form and we’ll get to work for you.

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, Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.


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