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Can You Make Extra Payments On A Car Lease?

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Are you thinking about paying off your leased car early? Leasing means that you’re essentially renting a vehicle for a set period. You may be wondering if you can make extra payments on your lease to speed up the process of owning the car outright.

The answer is yes, you can make extra payments on a leased car – but there may be some conditions and restrictions in place. On the other hand, if you’re concerned about saving money, paying your lease early isn’t always the best idea.

Is paying extra on a leased car beneficial? Let’s dive deeper into how car leasing works so you can make the best decision for your situation.

What is a car lease?

A car lease is an agreement between you and a leasing company in which you agree to pay a set amount of money each month to rent the vehicle for a set period – typically two to four years. At the end of the lease term, you can either return the car to the leasing company or purchase it outright.

The monthly payments you make on a leased car are typically lower than if you were to finance the purchase of a car with a loan. That’s because you’re only paying for the depreciation of the vehicle during your lease term, plus any fees and interest charges.

When you lease a car, you may also be required to make a down payment (also called a security deposit). This is typically equal to one or two monthly payments.

At the end of your lease term, you may also be charged a disposition fee, which is a fee for returning the leased vehicle.

Can you make extra payments on a car lease?

Yes, you can make extra payments on a car lease. Many leasing companies encourage lessees to do so. There are two reasons for this:

  • Making extra payments can help reduce the amount of interest you pay over the life of the lease.
  • Paying off your lease early can help you avoid mileage penalties.
  • Allows you to finish the lease early

On the contrary, paying extra payments to end the lease earlier isn’t the best idea if your goal is to save money. That’s because you may be charged a prepayment penalty for doing so.

A prepayment penalty is a fee that’s charged for paying off your lease early. It’s typically a percentage of the remaining balance on your lease. So, if you have two years left on your lease and you make a lump-sum payment to pay it off in full, you may be charged a prepayment penalty of 5% of the remaining balance.

Prepayment penalties are less common with car leases than they are with loans, but they can still apply in some cases. Be sure to read your lease agreement carefully to see if a prepayment penalty applies.

How to save money instead of paying off your lease early?

Instead of paying off your car lease early, it might be in your best interest if you consider buying a US Treasury i-Bond or investing in a high-yielding savings account.

When you invest in US Treasury Bills, you’re essentially lending money to the US government for a set period – anywhere from four weeks to 52 weeks. The government then pays you interest on the loan, and at the end of the loan term, you get your original investment back.

Treasury bills are considered one of the safest investments because they’re backed by the full faith and credit of the US government. They also tend to offer higher interest rates than savings accounts.

If you’re looking for a safe investment with a higher interest rate, consider investing in a high-yielding savings account. These accounts typically offer interest rates that are higher than the national average.

When you’re looking for a high-yielding savings account, be sure to compare the annual percentage yield (APY) and fees. Some accounts may have high APYs but also come with high fees. Others may have lower APYs but no fees. Find an account that offers a good balance of high interest and low fees.

Disadvantages of paying extra on a leased car?

You’ll be at a big disadvantage if the car is totaled or stolen because you will owe the leasing company the balance of the lease, which could be more than the car is worth.

Another disadvantage of paying extra on a leased car is that you may not be able to get all of your money back if you decide to sell the car before the end of the lease. That’s because the leasing company may have a “mileage penalty” for cars that are returned with more than the allowed number of miles.

In Conclusion

You can make extra payments on a car lease, but there may be some conditions and restrictions in place. On the other hand, if you’re concerned about saving money, paying your lease early isn’t always the best idea.

If you’re thinking about making extra payments on your car lease, be sure to check your lease agreement for any conditions or restrictions. You should also be aware of any prepayment penalties that may apply.

Investing in a US Treasury Bill or high-yielding savings account is a safer and more financially savvy way to grow your money.

About Me

I've been in car sales and finance for over 20 years, working at the highest volume dealerships in the nation including Fletcher Jones, DCH and more. Want to pick my brain on finding cars, negotiating cars, and structuring car deals?

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