Have you heard of car deals with 6,000CAD downpayment upfront and thought it wasn't a good idea? As most of my articles, I always say: "it depends." While numbers are literally white/black, facts are not. Downpayments affect the result of any deal: If you pay nothing, the monthly will be higher, if you put some, it will be average, and if you put a lot, the monthly will be crazy low. It can be used in your favor, or even against you, so today I'll be talking the pros & cons related to doing so.
Remember: A "Lease" is a Type of Rent
Yes, a car leasing isn't the same as a car rental, but it is somehow similar. When you go on a trip, and you rent a vehicle, you pay higher sums of money, but chances are you won't be driving a brand new car (although I have multiple times). The generality is that, if you rent a vehicle during a trip from a prestigious company, the vehicle production year will be likely the current or past year. Still, the rental period is short, and the sums will be higher compared to a car lease.
Leasing has a different approach: it will be a way long term, and the price will be lower, but the main difference is that we are talking about a brand new vehicle (except some demos or test-drive cars). But it will be a new one.
So you will be literally renting a vehicle for a more extended period of time, but you will have:
- The chance to buy it at the end at a prefixed estimated price known as Residual Value.
- The opportunity to pay up to 30% (in most cases) upfront. Most manufacturers limit this because of multiple reasons like inflation, interest rates and vehicle conditions that are estimated every year.
At this point, making a downpayment will clearly get you closer to that Residual Value. In the end:
- "your monthly payments + downpayment" = the difference between the MSRP of the brand new vehicle and the residual value plus the interests.
which we could simplify by saying that:
- (Total Months x Monthly Payment) + Downpayment = (MSRP - Residual Value) + Interest
Different Scenarios = Different Pros & Cons
Although the following cases rely on the fact presented on the previous formula, as I mentioned in the intro, multiple other reasons determine how good/bad could be to do a bigger or smaller payment upfront.
Having the Cash Down Results in a "Lighter" Contract
This is one of the positive things about a lease if at some point you need to do a lease transfer/takeover. The monthly payment is the first reason why a lease may be attractive to anyone. Just ask yourself, would you prefer to take over a lease (between the two same exact vehicles) with the one that got a bigger down payment or the other one? Basically, the remaining debt will be higher on the vehicle that has more to be paid than the one that initially got a lot of the premium reduced.
If somehow you think there are chances that your contract may need to be transferred in the future, it is not a bad idea to put 1,000 - 2,000 cash down, if it is affordable for you. Your contract will be way more attractive if you need to transfer it in the future.
For Business Taxes Purposes
If you have a business vehicle, chances are you know that the CRA has a limit of how much can be spent per year in a leased vehicle. You need to know it, otherwise, your accountant will give you very bad news at the end of the year on how much can be declared as expenses and how much not.
2018 deductible leasing costs are limited to $800CAD/month (plus applicable federal and provincial taxes), so ensure to do your math for your business vehicle before taking any decision.
If the Vehicle is Totalled, You Will Lose the Downpayment
And I will be now a very pessimistic person: Let's say you drive out of the delivery room with your brand new vehicle, you take on the highway and your car is smashed (you are safe and sound), but the vehicle repair costs are higher than the acquisition of a new one, what happens?
Very simple: the mandatory two-way insurance all leased vehicles must have, will pay the vehicle in full (if you had Replacement Value Insurance) to the vehicle owner, in this case, the financing entity assigned by the loan. Your contract will be over, and everything you put upfront won't be refundable.
Although this is very unlikely, I would personally not prefer to put more than 4 or 5 thousand on a car lease downpayment. On a financed vehicle, on the other hand, it is highly recommendable as "the vehicle owner" would be you instead.
Use a Trade-In as Downpayment
This would be the ideal scenario: you have a car, you don't need it anymore as you will be driving another one. It is not actual cash you have to debit from your accounts to pay upfront. It is a value you will transfer from one vehicle to the other one.
In either case, I always suggest getting a Replacement Value coverage with your insurance company. It will grant you that, in the case of a total loss, the vehicle will be replaced with one of the same value or as a check to do a payment on another one, if the vehicle was purchased.
