SINGLE PAYMENT CAR LEASE EXPLAINED
So, if I pay for my entire lease upfront, will I be saving money in the long-run?
A lot of people will opt for a single payment leasing contract where they pay the entire amount of the lease upfront upon signing the lease because a) it takes away the possibility of making late payments and ruining your credit and b) it’s a common thought that it’ll save you more money in the long-run.
But will it?
Do single lease payments bypass finance and interest monthly charges?
While paying for a regular loan upfront might take away the interest and finance charges associated with it, leasing works a little bit differently and is not the case, although it could eliminate some other charges.
As for your credit, paying for an entire lease payment upfront does not take away the debt obligation from your credit report.
There are two main approaches to single payment leases, both of which come with their own pros and cons.
Single Payment Approach #1
In this circumstance you’d pay for the depreciation value (the projected decline of value of the car at lease end expressed as a dollar amount) of your car, sales tax, and all your monthly payments upfront. Here, you don’t have to pay interest on depreciation of your car which takes away roughly 50% of the total amount of interest you’d have to pay otherwise. Which is nice.
However, you still pay interest on the residual (projected value of your car at the end of your lease).
We would probably recommend this approach, if any single payment approach, out of the two. It’s the most beneficial to the consumer, and the least beneficial for the leasing company #sorrynotsorry.
Single Payment Approach #2
Here, the leasing company computes your monthly payment to include sales tax, then multiplies that number by your entire leasing term to calculate your single payment cost. Not only is this approach infinitely easier to compute, you end up paying the exact same amount that you’d be paying if you’d lease the same car month to month, making this the better option for leasing companies for dealers, but leaving virtually no upside for consumers.
Okay, but is it easier to get credit approved for a single lease payment?
You could probably get away with a lower credit score for a single payment lease than if you were to pay off your lease month-to-month, but an above-average credit score is definitely still necessary.
Also, the lease will still show up on your credit report as a debt that you owe until you return your car at lease-end.
So…is it worth it?
The downside of single payment leases is virtually synonymous to the downside of putting too much money down upon signing – that if you find yourself in the predicament of a totaled or stolen car, your money is pretty much lost. The insurance company will only cover you for what the car is worth at market value which is usually always less than what you paid for it.
So it depends – it’s definitely a risky situation but if your residual value is significantly low, you could save a good amount on interest. Make sure to get a breakdown of your lease payment before you sign, so you can be sure you’re getting a good deal.
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