Three years ago, as I began to plot my exit from downtown Toronto, I began saving up for a used car. At the time, I figured $10,000 to $12,000 would be enough to net me something reliable. Three years and one pandemic later, however, I came to the conclusion that my original budget just wouldn’t cut it. So rather than buy, I decided to lease a new vehicle – and put the money I had saved toward a nice, fat down payment to offset my monthly leasing costs.
Then I did some research.
Most of the websites I consulted advised against putting a large down payment on a new car lease. According to those sources, the down payment wouldn’t save me much in the way of interest in the long run, and could be lost entirely if the car were stolen or totalled in a crash. But not everyone agrees with that point of view.
“Making a big down payment is only problematic if you total your car and if you don’t have coverage on your policy to protect [against] that depreciation,” said Anne Marie Thomas, the director of consumer and industry relations for the Insurance Bureau of Canada.
Thomas explained that Canadian drivers can purchase a waiver of depreciation endorsement as part of their insurance policy for new vehicles. While the endorsement coverage only lasts for the vehicle’s first three years on the road, it guarantees that depreciation is not taken into consideration if the vehicle is stolen or totalled during that time.
“In the event of a total loss, [the driver] would recoup their money because the insurance company would pay back what’s owed on the lease,” she said. “The driver would get their down payment back, because what’s owed on the lease is less than what the insurance company would pay the driver.”
In other words, in the event of a total loss or theft, the waiver of depreciation endorsement would require the insurance provider to reimburse the driver for the full value of the vehicle, not just its depreciated value. With those funds, the driver could cover the remaining lease payments, and pocket the remainder, which should be equivalent to the down payment.
Thomas said a waiver of depreciation endorsement is beneficial for all drivers who lease a new vehicle, regardless of whether they make a down payment.
“Cars are not cheap, and depreciation of 5 per cent [a year, for example] might sound like not a lot, but if you’re talking tens of thousands of dollars, that’s not insignificant,” she said.
A waiver of depreciation endorsement, however, is just one of many factors to be considered.
According to Nora Dunn, a spokeswoman for personal finance site Nerd Wallet, your car lease down payment decision should be influenced by whether or not the buyer is self-employed, the total cost of the vehicle, insurance costs, the lease interest rate and even the time of the year.
She explains that those who are self-employed can write off up to $900 of their lease payments per month against their income during the first calendar year. If, however, their lease payment is $600, for example, they can also write off up to $300 for each remaining month of the year against their down payment.
Those who are self employed can calculate how much of their down payment is tax deductible by subtracting their monthly payments from the $900 limit, and multiplying the remainder by the number of months left in the year. For example, if they start a lease with $600 in monthly payments in January, they can write off up to $300 a month, or $3,600 a year, of their down payment. If, however, they were to start that same lease in October, only $900 of the down payment would be tax deductible ($300 a month for three months).
For those who aren’t self employed and don’t have adequate auto insurance coverage to protect their down payment in the event of a theft or total loss, Dunn says a large down payment offers little in the way of long-term savings.
“Most leases have minimal interest to begin with,” she said.
In some cases, drivers might prefer to hang onto their down payment by putting those funds into a high-interest savings account. While it might cost slightly more in the long run, it can be an effective way to keep those funds available while still using them to offset lease costs.
“The conventional wisdom is that you should not put down a big down payment on a leased car,” Dunn said, “but it depends on the calculations.”
I ultimately followed the advice of others and decided not to put a down payment on my lease, but in hindsight, as someone who is self-employed, I probably should have. Instead I put that money into a high interest savings account that I can draw from each month to help with car payments, and which has the added benefit of also serving as an emergency fund.