Does a down payment make sense when leasing?
When leasing, a down payment, also called upfront payment or initial payment, can make sense in certain situations.
- The down payment can significantly reduce the monthly rates, as the total financing amount is lowered by a down payment.
- A down payment may increase the likelihood of being accepted for a lease by the bank, since the down payment acts as a financial security. This can especially be the case if the customer applying for a lease is on the fringe of being accepted for the car in question.
- Some leasing companies or banks can require a down payment for some cars, especially more expensive ones.
Nevertheless, it is advised to never exceed 30% of the car’s purchase price with the down payment - or to just keep it as low as possible.
There are two reasons for this:
a) A high down payment will bind capital within a car, potentially making the customer less financially flexible
b) In the case of total damage, when the car is a complete write-off, the down payment is not reimbursed, resulting in the loss of money.
In the end, it comes down to personal preferences whether to make an initial down payment or not.
Note: The customer does not receive the down payment back at the end of the lease. It serves as a lump sum to reduce leasing rates rather than a security, like when renting a flat.
Synonyms: Upfront Payment, Initial Payment