How does a down payment affect a lease?

How does a down payment affect a lease?

• A. It increases the total financed amount.
• B. It reduces the total financed amount.
• C. It has no effect on financing.
• D. It increases the lease term.

Answer: (B)

A down payment lowers the amount being financed in a lease, often called a capitalized cost reduction. In a lease, the finance charge and the monthly payment are calculated from the capitalized cost minus the residual value. When you make a down payment, the capitalized cost is reduced, so the depreciation portion (cap cost minus residual) and the amount subject to interest shrink. That means monthly payments are lower and the total payments over the term are reduced. The lease term itself doesn’t change just because you put more money down. For example, lowering the cap cost from 30,000 to 27,000 reduces the base on which depreciation and interest are calculated, leading to lower total lease payments.

A down payment lowers the amount being financed in a lease, often called a capitalized cost reduction. In a lease, the finance charge and the monthly payment are calculated from the capitalized cost minus the residual value. When you make a down payment, the capitalized cost is reduced, so the depreciation portion (cap cost minus residual) and the amount subject to interest shrink. That means monthly payments are lower and the total payments over the term are reduced. The lease term itself doesn’t change just because you put more money down. For example, lowering the cap cost from 30,000 to 27,000 reduces the base on which depreciation and interest are calculated, leading to lower total lease payments.