Prepaid Car Lease
Prepaid car leases are also known as single-payment car leases and are usually an option for people who have available large amounts of money in cash. It’s a possibility to lease a car, not have to pay monthly payments and even save some money. Nonetheless it would be wise to make sure that paying all the money up front is advantageous and also if there are any drawbacks that might convince you to walk away.
It would seem that in the case of a prepaid car lease you would actually eliminate some extra expenses caused by all the finance charges or the interest that is usually associated with the idea of a car lease, paid for monthly. But, the entire process isn’t that simple. When you prepay a car lease you aren’t paying for the entire value of the car, but for its depreciation and you are also required to pay interest for the residual portion, but no for the depreciation amount. As a result, you will save some money, because you avoid paying for some finance charges, but you will still pay interest on the residual value.
In other words, when you prepay a lease you don’t actually pay it all off at once. You pay up front for everything except the lease-end return value (residual value). As a result, finance charges will still have to be paid for that amount. They can be included in your initial cash payment. The reminder of the loan will be paid at the end of the lease, when you return the vehicle to the dealer.
So, by opting for a prepaid car lease you are saving money you would have otherwise spent on interest and sales tax. The total savings might be less than you expect, especially if you compare their value with the expenses involved by a short term car lease. You will avoid paying some of the interest, but not the entire amount. That’s why it might be wise to ask the leasing dealer tell you the amount you will have to pay if you choose a prepaid car lease or a traditional car lease. If the two sums are the same you can assume that the dealer uses a formula that actually sums all the monthly payments, including interest.
Sales-tax is another expense that can be avoided when you choose a prepaid car lease. In most states that expense is added to the monthly payment. You should remember that those payments also include depreciation and interest. So, even if it might seem unfair, you are paying interest on the sales tax. By eliminating the monthly interest, you will save that amount. You will still pay the sales tax on the depreciation amount, but only as part of that single payment.
There is one major disadvantage regarding the prepaid lease. If the car you leased is stolen or completely totaled, the car insurance you purchased will cover only the current market value of the car leased. As a result, you might end up loosing an important part of the money you have already invested in the vehicle by paying that upfront payment. In the case of the traditional car lease, gap coverage will protect you from such a situation. You would only have to cover your insurance deductible. You can include gap insurance in your prepaid car lease as well, but it would do you no good, because it will not cover your cash losses.
You should choose a prepaid car lease, only after you have discussed with the dealer and understood the benefits and the risks.
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