Trade Leased Car – Smart Idea or Not?
Is it possible to trade a lease car when buying or leasing a new car?
If you are leasing a car and are considering buying or leasing another car, is it a good idea to trade the leased car before the old lease is finished – or is it better to wait until lease-end to trade – or neither?
Trading a leased car is not quite the same as trading a car that has been purchased, even those purchased with a loan.
There are differences that often make trading a leased car not feasible, even though it might not be obvious at first glance.
Let’s review some leasing basics first
When leasing, you don’t own the vehicle. You typically don’t build up any ownership equity unless you made a very large down payment or had a valuable trade-in at the beginning of the lease.
This means, for most leases, your payments never quite keep up with the ever-increasing depreciated value of the vehicle — you are always “upside down.” Even at the end of the lease, the actual market value of the vehicle will usually be less than the residual, or purchase option, value.
Therefore, you have nothing to trade to a dealer for a new vehicle. You have no “equity.”
The exception, again, would be if either your early payoff amount (get it from your lease company) or the sum of remaining payments is less than the market value, or trade-in value, of your vehicle. You can check trade-in values at www.kbb.com or www.nadaguides.com.
The way that this might happen is if you had made a large down payment (cap cost reduction) at the beginning of your lease, or you had traded a vehicle that was worth a lot of trade-in credit. In these cases, it is possible that you might have positive equity that could be used as trade-in credit on a new vehicle.
It is also possible that you could have some trade equity simply because the lease finance company originally under-estimated the lease-end value of your car. As a result, you have been making higher payments and building some equity.
How does a lease trade-in work?
A lease trade can work in a number of different ways, usually determined by the dealer, who will work it out to his advantage. Here are some scenarios:
You are at the end of your lease and you would like to trade for a new vehicle – You should determine the trade value of your vehicle (www.kbb.com or www.nadaguides.com) and compare that with the lease-end residual value (purchase option value) in your lease contract. If the trade value is higher, you have some positive trade equity that can be used as credit (down payment) towards a new purchase or lease.
However, most leases are structured such that this situation rarely occurs. In most cases, the trade value is lower and you should simply return the car to the lease company and start a new purchase or lease from scratch.
You are near the end of your lease and would like to trade for a new vehicle – One of two scenarios could take place here. You should make sure you understand which one will apply by asking your dealer and carefully inspecting your paperwork.
1. The dealer pays off your old lease balance, buys the car from the lease company for his used car lot, gives you trade-in credit for the car, and either adds or deducts any difference to your new purchase or lease.
If the cost to the dealer of paying off your lease is higher than the credit he gives you for the car, the deficit, or negative equity, is added to your new purchase or lease.
If the cost is lower, the difference is subtracted from your new purchase or lease and treated as a down payment. All these figures should explicitly appear in your new purchase or lease contract.
2. The dealer makes your last few lease payments, returns the vehicle to the lease company (does not buy it from lease company), and gives you no trade-in credit.
However, the dealer may not be as generous as he seems because he will most likely add the amount of the payments to the cost of your new purchase or lease. He may or may not tell you about this small detail. None of these figures may appear in your new purchase or lease contract.
Since your car is returned to the lease company, all normal lease-end conditions apply. If your car has damages, excessive wear-and-tear, or extra miles, you will be sent a bill by the lease company, just as you would have if you had returned the car yourself at lease-end. The dealer will not pay these fees for you. Remember, the dealer didn’t actually take the car in trade.
You are in the early or middle stages of your lease, not near the end, and would like to trade for a new vehicle – This is almost never a good option. The cost of ending a lease this early is typically very high, and exceeds the current market or trade value of the vehicle. You have high negative equity and no trade credit.
It might be possible that a dealer would pay off the lease and add the negative equity back into a new purchase or lease, but the added cost would usually make the new car prohibitively expensive — or you might be required to make a large down payment to offset the high negative balance. Again, the dealer has two options:
1. Buy the car from the lease company by paying off the lease, or
2. Return the car to the lease company and pay the early termination costs — whichever option gives him (dealer), not you, the most benefit.
A better option than trading might be a lease transfer. In this way, you get out of your lease altogether and then buy or lease your new car. Using a service such as Swapalease is the easiest, fastest way to transfer your remaining lease to someone who is interested in taking it over. It’s inexpensive and avoids the hassle and potential problems of a trade.
Don’t Overlook Insurance
When trading cars, don’t assume your current auto insurance company has the best rates on your new vehicle. Since most lease and loan finance companies require full coverage insurance, rates can vary widely between different companies. It’s always wise to compare your current company to other company rates, such as those from Liberty Mutual Insurance. It’s so easy to do that there’s no reason not to do it. Get your free auto insurance quote from Esurance in minutes & start saving today!
Get the best deal on your new vehicle
Whether you are trading for another lease vehicle or a new purchase vehicle, you should be looking for the best deals.
One of the best and easiest ways to find the best car prices is to use our FREE Car Deal Finder tool that gets you price offers from dealers in your area who are competing for your business. You do not have to trade at the same dealer from which you originally leased.
Trading a leased car is a bit more complicated than trading a purchased car. In most cases, it is not practical to trade a leased car, although dealers can make it seem like a good thing to do. Dealers will work the deal to their advantage, not yours. Therefore, you should try avoiding such a trade unless you absolutely know you will benefit from it.