Should you put money down on a lease?

The lease ends early, and your down payment usually doesn't come back. The Federal Reserve's leasing guide explains that a stolen or totaled car ends the lease. You may owe the difference between what's left on the lease and what the car is worth. GAP coverage, if you have it, can pay some or all of that difference.

But GAP coverage doesn't cover any capitalized cost reduction or fees you paid at signing. It also doesn't cover past-due payments, and in most cases not your insurance deductible either. The Federal Reserve gives this example:

• You put $3,000 down. The car is stolen, the lease payoff is $14,000, and the car's insured value is $12,000.
• Insurance pays $11,500 (the $12,000 value minus your $500 deductible) to the leasing company.
• GAP covers the $2,000 gap. You still pay the $500 deductible. Without GAP, you'd owe $2,500.
• Either way, the $3,000 you put down is gone.

Taxes can sting too. In states where you pay sales tax when the lease starts, GAP doesn't pay that tax back unless it was rolled into the lease. And you'll pay sales tax again on your next lease.

Check your lease first. The Federal Reserve says many leases include GAP coverage as a standard feature at no separate charge. Others offer it as an option for an extra fee. Leases that include it often require you to keep your car insurance and stay current on payments.

If you're offered GAP as an add-on, the CFPB says it's optional, its price can vary a lot, and your own car insurance company may sell it too. If a dealer says you must buy it, ask where the contract says so.

Remember what GAP is for: it covers the gap between what you'd owe on the lease and what insurance pays. It won't give back money you put down. That's one more reason to keep your down payment small.

Federal lease rules (Regulation M) say the leasing company must list each part of the amount due at signing. That includes any refundable security deposit, first payment, and capitalized cost reduction. For car leases, it must also show how you're paying it: trade-in credit, rebates, or cash.

Common charges, according to the Federal Reserve, include:

• The first monthly payment.
• A security deposit, which can be used for anything you owe at the end. Whatever's left may be refunded.
• A capitalized cost reduction: cash down, trade-in credit, or a rebate. GAP won't pay this back if the car is stolen or totaled.
• Taxes, which in some states include sales tax on the capitalized cost reduction itself.
• Registration, title, and documentation fees.

Watch for “$0 due at signing” ads. The FTC warns that the fine print may still require fees at signing, sometimes several thousand dollars. Ask for the amount due at signing, the total due under the lease, the mileage limit, and any end-of-lease charges, in writing.

Money down does lower the monthly payment. The Federal Reserve explains it cuts the amount of depreciation you pay each month and trims the total rent charge (the lease's version of interest). The question is whether that saving is worth the risk of losing the money.

To find out, get two written quotes for the same car, term, and mileage. Keep the fees, taxes, and first payment the same, and change only the money down. Then compare the totals. The lease disclosure's total of payments is “the amount you will have paid by the end of the lease.” It leaves out refundable amounts like a security deposit, and it already includes end-of-lease charges like a disposition fee.

You can check whether a quoted payment matches the lease's terms with the lease check.

Read the lease, any GAP terms, and your insurance policy before you sign. Ask what happens to your deposits and any balance owed if the car is totaled, and get the answer in writing. Leasing also comes with other costs to plan for. The FTC lists charges for extra miles, excess wear, and ending the lease early.