“You literally can come in with no money and drive away,” says Scott Hall, executive vice president of Swapalease.
With a good credit score of 675 or better, only a signature is needed to drive away, Hall says. But before signing on the dotted line, even if you have excellent credit, you should know what you’re getting into.
What is ‘sign and drive?
Whether a typical lease or a sign and drive lease, leasing a car requires paying for a car that you won’t eventually own. You’ll make lower monthly payments with a lease than you would by purchasing the vehicle, but you’ll have to return the car at the end of the contract — usually three to five years.
Unlike a regular lease, where a down payment of $3,000 or so will include a security deposit, registration and monthly payment, and will be part of the down payment on the car, a sign and drive lease doesn’t require any money down — up to a point. You may have to pay taxes, title and registration fees with a sign and lease deal.
A sign and drive deal could also have a higher monthly payment than a regular lease deal, as a way for the dealer to move the costs of no money down into it. Having a regular lease with a $3,000 or so down payment can lower the monthly payments. Interest rates on the loan, however, aren’t affected by the type of lease.
Some car makers may use leases to move cars if they have an abundance of inventory. The leasing company may even subsidize the sign and drive lease deals with rebates to the auto dealer that the public doesn’t see, Hall says.
When can this be a good deal?
Not putting money down is the major benefit of a sign and lease, but there are others.
If you don’t drive more than 12,000 miles per year, which is a common mileage cap in many leases, then a lease can make sense.
A primary benefit of a lease, supporters say, is being able to drive a new vehicle more often. And since most leases are for three years, the vehicles are covered under the manufacturer’s warranty, Hall says.
Like updating a phone, drivers will also get updated car features and can take advantage of new technology by leasing a new car every few years.
When is it a bad deal?
Leasing is more expensive than buying, so if you plan on keeping the car for at least three years and can afford the down payment, then buying is your best option, says Mitchell Weiss, an adjunct professor of finance at the University of Hartford.
Even if you plan on leasing a car, you should walk into the dealership like you’re going to buy the car and negotiate the best price, Weiss recommends. Lease prices are negotiable, just as the price is when buying a car.
“You want to negotiate that price of the car down,” he says. “You want to tell them that you’re willing to pay cash and then you can drive that lease down.”
Like shopping for any other commodity, the best comeback when a car dealer haggles over price is to leave and shop elsewhere, Weiss says.
“It all comes down to price,” he says. “Are they getting a premium out of a sign and drive?”
Paying for diminished value
Most cars aren’t assets that gain value over time. This is especially true with leased cars.
“When you lease, you are effectively financing a percentage of the car’s value over the lease term, but paying interest on the full value of the car,” says Jonathan Duong, a certified financial planner at Wealth Engineers.
At the end of the lease, you either return the vehicle or pay its residual value, making it similar to a loan with a balloon payment, Duong says. With a higher residual value, the monthly payment will be lower and reflect less depreciation.
The math behind a lease can be complex. Just don’t let a sign and drive deal fog up the fine print.
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