Money Down when Leasing and Financing

dthatcher7 · March 2016

So I am looking to get a car in a few months and I have this idea stuck in my head that I can't seem to work out the logic to. That is, it seems to make no sense to put any money down on a lease, but it makes a ton of sense to plenty of money down on a purchase. However, I could total the car in either case and be out my down payment, so it seems like money down in either scenario is the same risk. Thoughts?

Thanks

carperso · March 2016

Gap Insurance covers the difference between the money owed and valuation by the insurance company. If financed, you get the difference, If leased it goes to the leasing company. correct me if i am wrong

kyfdx · March 2016

dthatcher7 said:
So I am looking to get a car in a few months and I have this idea stuck in my head that I can't seem to work out the logic to. That is, it seems to make no sense to put any money down on a lease, but it makes a ton of sense to plenty of money down on a purchase. However, I could total the car in either case and be out my down payment, so it seems like money down in either scenario is the same risk. Thoughts?

Thanks

For most captive leasing banks, GAP insurance is included at no extra charge on their leases. So, you have protection, in case the insurance payoff won't cover the lease balance. (Toyota is an exception to this. GAP is available, but at an extra cost).

The reasoning is as follows: You lease a $40K car, but put $5K upfront, making the lease balance $35K at the start. Two months later, the car is totaled, and insurance values it at $36K. The lease is paid off, and perhaps you'll get $1000 back (perhaps not, depending on insurance company). Assuming you do get the $1000, you are out $4000 plus two payments to lease a car for 2 months. GAP won't help you, because it only covers a shortfall in paying off the lease balance. However, if you had put nothing upfront, and the lease balance is $40K, insurance pays $36K, GAP covers the $4000 shortfall, and you only make 2 lease payments to drive the car for two months.

So... why risk your downpayment, when the bank is paying for an insurance policy that covers that money?

Without GAP insurance, you are correct, there is no difference between buying or leasing. Or, whether you make a downpayment or not. In either scenario, you could be out $4K. It's the included GAP insurance that makes the difference. You can buy it on your own, but that changes the calculations.

dthatcher7 · March 2016

I see what you are saying in regards to leasing. How does that compare to these buying scenarios:
1) buying a car through a loan with no down payment but getting GAP insurance from my auto insurer
2) buying a car through a loan with enough down payment to ensure I don't need GAP insurance.

It seems #2 makes no sense, you might total it and then you are out your down payment. (Although you would've saved on GAP insurance, although that cost could be relatively unsubstantial.)

Michaell · March 2016

dthatcher7 said:
I see what you are saying in regards to leasing. How does that compare to these buying scenarios:
1) buying a car through a loan with no down payment but getting GAP insurance from my auto insurer
2) buying a car through a loan with enough down payment to ensure I don't need GAP insurance.

It seems #2 makes no sense, you might total it and then you are out your down payment. (Although you would've saved on GAP insurance, although that cost could be relatively unsubstantial.)

GAP is GAP, regardless of the provider - your insurance company or the bank with whom the loan is through.

For scenario 2, you are right - if you put enough $$$ down to ensure you're never 'upside down' in the loan, there isn't much point in having GAP insurance at all.

kyfdx · March 2016

dthatcher7 said:
I see what you are saying in regards to leasing. How does that compare to these buying scenarios:
1) buying a car through a loan with no down payment but getting GAP insurance from my auto insurer
2) buying a car through a loan with enough down payment to ensure I don't need GAP insurance.

It seems #2 makes no sense, you might total it and then you are out your down payment. (Although you would've saved on GAP insurance, although that cost could be relatively unsubstantial.)

You are right... with any purchase of an item that depreciates, you are at risk if the item is lost or stolen.

And, without GAP, it doesn't matter if you make a downpayment or not. The same amount of money is still at risk. So, no point in making a big downpayment.. Keep it in your pocket to pay off the loan, in the small chance that your car is a total loss.

If you make a big downpayment, then GAP wouldn't help you, anyway, as there will probably not be a GAP to be covered (though, you'll still be out your downpayment).

Of course, on a ZERO down car purchase, the risk of a GAP goes down fairly quickly. You have to balance that against the possibility of loss (pretty small) and the cost of GAP insurance (variable).

On a lease, I recommend not making downpayments for two reasons:
1) Included GAP insurance - might as well take advantage of it.
2) Big downpayments obscure the true cost of renting a car ("I only pay $99/month!").

On a purchase? Personally, I just shoulder the risk, rather than pay extra to insure it. Insuring relatively small risks usually comes with a high cost/benefit ratio.

Money Down when Leasing and Financing

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