Down Payment, Cap Cost Reduction, Start Fee — Which One Saves You Money?

The Difference Between a Down Payment, a Cap Cost Reduction, and a Start Fee

See which one saves you money.

As an advertising copywriter who has written car ads for many, many years, I often get asked the same questions. What’s a down payment? What’s a cap cost reduction? What’s a start fee? What’s my favorite car commercial? 

OK, that last one might not be important, but there’s a lot to learn about the financial terms when you’re considering a new car — and which one can save you money when you’re ready to get driving.

Say you’ve got your heart set on a Tesla Model 3. Assuming you can make it through the months-long waiting list, getting one usually involves two options: financing or leasing. The thing is, terms like “down payment,” “cap cost reduction,” and “start fee” can be confusing. Here’s what you should know about them.

What Is a Down Payment? 

Before we get into leases and car subscriptions, it’s helpful to review the concept of a down payment. Since most lenders won’t finance 100% of a vehicle, they’ll require you to put some money down. A 20% down payment is recommended by many financial experts, though the actual amount will vary. So if you’re buying a $10,000 car, you might choose to put down $2,000 and finance the remaining $8,000. 

When you put more money down, you won’t need to borrow as much. That means lower monthly payments, as well as a lower overall cost due to accumulating interest.

The Pros of Financing a Car:

• It has value; you can sell your vehicle at any time.
• There’s no mileage limit; drive it as much or as little as you want.
• You have the ability to sell or trade; your car’s value will depend on the model and condition.

The Cons of Financing a Car:

• You have higher monthly payments; the average new car in the U.S. is sold for over $47,000.
• It’s a long-term financial commitment; paying off a car often takes five to seven years.
• There are long-term maintenance costs; they can add up, especially with gas-powered cars.

What Is a Cap Cost Reduction?

A cap cost reduction is similar in concept to a down payment, but it applies to leases. With a lease, you’re paying for a fixed period with the vehicle — usually 24 to 36 months. Your total cost is calculated by taking the purchase price, subtracting what the lessor determines it will be worth at lease end, then adding an interest rate or money factor to the remaining amount. If you lease a $35,000 Tesla Model 3, and the lender determines it will be worth $15,000 at the end of a three-year term, your lease will go toward the remaining $20,000. 

The cap cost reduction — or capitalized cost reduction — is what you can pay up front to lower the cost of a lease. If your cost is $4,000, you can pay $1,000 up front and make monthly lease payments on the remaining $3,000. If you think that sounds similar to a down payment, you’re not alone.

The Pros of Leasing a Car:

• You have lower monthly payments; you pay less than you would with traditional financing.
• There are more vehicle options; you may be able to afford to drive a more premium car.
• You have a buyout option; you can purchase the car at the end of your term.

The Cons of Leasing a Car:

• There’s an early termination fee; returning your car early usually requires an additional fee.
• It’s a long-term commitment; the average lease clocks in at a three-year term.
• You don’t own the car; you can’t sell the vehicle unless you purchase at the end of your lease.

What Is a Monthly Car Subscription and a Start Fee?

Subscribing to a car makes it easy to get behind the wheel without a long-term commitment. It’s similar to a lease with a monthly payment, but you can enjoy a lot more flexibility. And since you’re not on the hook for fixed depreciation, you’re only paying for the car as long as you want to use it.

A monthly car subscription may be a new concept, but it’s not unlike streaming shows, movies, and music. Instead of owning a library of entertainment, you get instant access without owning anything outright. With a monthly car subscription, you can go to all the places you want without worrying about the logistics of ownership. And if you want to take a break, simply cancel your subscription.

So, what’s a start fee? It’s similar to a cap cost reduction or down payment, but for subscriptions. The higher you set your start fee, the lower your monthly payment. The difference is that you can keep the car for as long or as little time as you want after a short holding period, such as three months. In many cases, you can even save money, compared with a traditional loan or lease.

With electric vehicle subscriptions, you can combine the long-term debt-free car subscription model with the opportunity to free yourself from vehicle fossil fuels. EV subscriptions to cars such as the Tesla Model 3 also include occasional costs like routine maintenance, further freeing you from the typical burdens of car ownership.

The Pros of Subscribing to a Car:

• There’s unmatched flexibility; pay as you go, and return it anytime after an initial 3 months, unlike a 3-year lease.
• Getting one is easy; there’s no need for negotiation, title, or registration.
• You don’t own the car; put long-term debt in your rearview mirror.

The Cons of Subscribing to a Car:

There’s no buyout option; you can’t purchase the vehicle you’ve been driving.

• It doesn't build credit; you can't increase your score with on-time payments.
• Similar to a lease, you don’t own the car; you can’t sell a subscription vehicle.

Knowledge Is Power

Getting a car can be one of the most exciting chapters of life, and there’s more than one way to make it happen. Understanding the difference between a lease, a loan, and a subscription can help you make an informed decision — especially when it comes to paying money up front.

And if you’re still wondering what my favorite car commercial is, it’s the Super Bowl commercial for Hyundai in which Jason Bateman plays an elevator operator who explains the levels of car-buying hell. So funny. And so true.