Updated: Sep 30, 2020
In life, nothing is free and $0 down may be too good to be true! So what does 0-down mean and what is in a typical ‘drive off’ check?
From LeaseHackr.com, a down payment simply refers to the amount paid upfront to reduce the amount financed over the course of a lease.
Even with a $0 down payment lease, there are still fees and other expenses to pay before you can drive off in your new car:
first month's payment;
license and registration;
These drive-offs, as they're called, can amount to hundreds of dollars, or in some instances, even a few thousand. You can request to roll the drive-offs into the monthly payment, or have it paid with rebates, should you want a true $0 drive-off lease.
Keep in mind, that the only way to reduce your interest rate, aka money factor, is through Multiple Security Deposits (MSDs). MSDs are refundable at the end of your lease, unless you have excess wear and tear (i.e: damage to your vehicle that has not been repaired). Regardless, this damage has to be paid by you so by giving the leaser peace of mind, they give you a lower interest rate. Otherwise, no excess wear and tear, you will receive a full refund on your MSDs.
As noted above, the drive-off check most people write includes the first month’s payment, the license and registration fee, the lease acquisition fee, and taxes.
If you don’t include the acquisition fee, it will be added to the agreed-upon price of the vehicle and increase the final or ‘net’ capitalized cost. (In New York and New Jersey, states that require all the lease’s sales tax money up front, some customers add that amount to the drive-off check, while others roll it into the capitalized cost and pay it over the lease term, along with a little interest.)
Anything you pay up front over and above those four items, either in cash or in the value of a trade-in, is what is a “down payment” and leasing companies call a “capitalized cost reduction.” Down payment does not save you money! You are 'reducing' your monthly payments, but paying the same total amount over the course of three years! This is why we recommend MSDs instead of down payment!
That additional money pre-pays some depreciation, reducing your monthly payments. (On a three-year lease, each extra $1,000 you pay up front would reduce your pre-tax monthly payment by about $28 to $30, depending on the money factor. Note: Cap cost reductions are taxed at the same rate as monthly payments.
Note also that in many leasing ads featuring low monthly payments, the “fine print” often lists a hefty required initial payment of $2,000 to $3,000 or more, much or most of which is a capitalized cost reduction. (You can often beat the monthly payment featured in those ads by negotiating a lower “agreed-upon” price than the one assumed for the ad. That’s because automakers can’t use a price so low that it would anger their dealers. Sometimes those ads use the full retail/sticker price as the capitalized cost!)