Shopping for a new car can put a huge dent in your bank account. When you lease a car, you do not have to shell out a substantial chunk of cash from your account. However, leasing deals require you to pay a sizeable principal amount upfront, followed by monthly installments.
You may also have come across phrases like “zero down payment,” “zero down,” or “zero money down” for new car deals. The terms indicate that there are no initial costs or deposit amounts. But is it truly the case? Keep reading to find out.
How Do Lease Payments Work?
A lease is an agreement between the company (car provider) and the person borrowing the car. Leasing a car is like renting it — you have a car but you do not own it. The lease payment involves other factors that are broken down so that you pay a monthly installment. Once your contract or usage period is over, you can return the car and stop paying the monthly installments.
Following are the costs involved in the lease payment you make during car ownership:
Down payment: This is also called capitalized cost reduction or cap cost reduction. It is the amount you pay upfront. It does not affect the overall cost of the lease; however, it does reduce the monthly payment amounts.
Depreciation: A car or any other automobile for that matter loses its value with time. The lease’s length will decide the amount of depreciation of the car. The value of the car at the end of the leasing period is calculated and the difference in value from the original price is calculated. This difference is included in your monthly payment. Depreciation charges make up the bulk of your monthly payment.
Fees: Acquisition fees, documentation fees, bank fees, and other fees are included in the down payment or in your monthly installments.
Interest: This is the interest rate at which you rent the car. It is lower for people with a higher credit score and higher for individuals with poor credit.
Taxes: You will have to pay sales tax, monthly tax, and other taxes. However, you do not have to pay tax on the total cost of the car.
What Do Zero Down Lease Deals Mean?
Zero-down lease deals do not mean you do not have to pay anything. It just means that you pay zero down payment.
As mentioned above, a lease payment is the sum of the various costs of owning a car on lease. When you pay a down payment, your monthly installments decrease.
However, with a zero down payment, your monthly installments will increase. You will also be paying the entire cost of depreciation on credit, so you will have to pay more interest.
Moreover, a zero down payment does not mean there is no money transaction. You still have to pay sales tax, documentation fees, the first month’s payment, and license and registration fees.
Is It Better To Put No Money Down On A Car Lease?
No money down seems like a great deal, but people are always worried if the deals are legit or if they may cause more trouble.
Many experts believe that a zero-down lease is the best way to structure a car deal. This is because the car is always on a lease, and you are never its owner. If the car is stolen, the insurance money goes to the titleholder (company), and the lease contract terminates. So, the huge amount you pay as the upfront cost is lost.
The same is applicable in the case of accidents. Zero lease is also riskier for the company, so only people with the best credit ratings can avail of zero down lease deals. This is a significant drawback, as you may not even qualify for a zero-down lease.
If zero-down lease interests you, read the following pros and cons before making a decision.
Pros And Cons Of Zero-Down Lease Deal
1. With No Down Payment, You Pay Less Money Upfront
This is especially beneficial for people who take out a loan to pay the upfront cost. With a zero lease, you do not have to borrow a large amount of money and just need to pay the monthly installments.
2. Slow Tax Payment
With a zero down payment, the entire cost is distributed across installments. So, you pay smaller tax amounts on the small monthly payment, rather than a large one on the upfront cost. This also proves beneficial in cases when the ownership of the car is lost due to accidents, robbery, and other reasons.
3. Low Risk
As mentioned above, the car is the property of the leasing company and any cost you have paid is lost in case of accidents and theft. All the insurance money goes to the leaser, and the contract ends.
1. Higher Monthly Payments
With an upfront deposit amount, your monthly load decreases. With a zero-down lease, as the amount extends over a longer period, the interests and tax payments also increase. This means higher monthly payment burdens.
2. Higher Interest Amounts
As an amount goes up, so does the interest. When you lease on a zero payment, your monthly installments rise, which also increases your interest amount. When you compare the two interest amounts you pay (one where you have made a down payment and one with a zero lease), you will find that you pay a much higher interest amount with zero lease deals.
3. Difficult To Qualify For
Zero leases are riskier for the company, so they extend the benefit only to people with the highest guarantee or what is referred to as a “Tier 1” credit score.
However, even without a Tier 1 credit score, you still have a chance at zero down leases if you have a co-signer with a high credit score.