If possible, trading in a leased car is not the same as trading in a car purchased or financed with a loan. Monthly lease payments are often lower than a monthly financed payment would be on that same car, as your money is going toward just the expected depreciation during the lease agreement, in addition to taxes on that amount, fees and a rent charge. When the lease term ends, you either return the car or purchase the vehicle. Since you don’t own a leased vehicle you also don’t accrue any equity. However, if your early payoff amount or the sum of remaining payments is not greater than the trade-in value of the vehicle then you might have some positive equity for a trade-in credit on a new car. For example, if the remaining payments on your leased vehicle total $5,000, yet the trade-in value of the car is $7,500, then you would have $2,500 in positive equity to apply toward a new car.
If you are in a lease agreement and are thinking about trading in for a new car then you should first find out the trade-in value at www.kbb.com or www.nadaguides.com. Then compare that amount with the lease-end residual value or buyout of your lease contract. For example, the trade-in value of your car may be $7,500 but the car lease buyout—the cost to buy the vehicle from the leasing company—might be $10,000.
Trading in at the Beginning of a Lease
If you are in the early stages of your lease contract it is not a good move to trade for a new car. You have not only a high negative equity and no trade credit but also the very high cost for ending a lease so early, which will far outweigh the current value of the car. In this scenario, the dealer could agree to return the car to the leasing company and pay the early termination costs, or pay off the lease. However, the added costs that you would face in either scenario to make up for the negative equity would make a new car extremely expensive.
Trading in Near the End of a Lease
If you are near the end of your lease contract there are a few scenarios that could apply. The dealer could opt to pay off your old lease balance and place the car in his car lot. If the cost to the dealer is greater than the credit for your car then the negative equity is added to your new purchase or lease agreement. For example, if the cost to the dealer is $10,000 but the credit for your car is $7,000 then the negative equity, in this case $3,000, would be rolled into your new purchase or lease agreement. However, if the cost is lower, then that difference is deducted and treated as a down payment. A second scenario is that the dealer pays the last few lease payments, returns the car to the lease company and offers you no trade-in credit. You could still be responsible for fees related to your returned lease, and there’s a chance the dealer might take the amount of the remaining payments and roll that into the cost of your new purchase or lease agreement.
Trading in at the End of a Lease
If you have reached the end of your lease contract and would like to trade in for a new vehicle, then you should figure out the trade-in value of your car using the resources listed above. Compare that figure with the purchase value option in your lease contract and if the trade value is greater then you have some equity that can be applied toward a new car. For example, if the trade-in value of your car is $10,000 and the lease-end residual value of your lease contract--the cost to buy the vehicle from the leasing company--is $8,000 then you have $2,000 toward a new car. However, because of the way leases are structured, it is unlikely that this will occur. Usually, the trade-in value will be lower, and it is best to just start fresh with a new purchase or lease.
Negotiating a Lease
Because the terms and price calculations can be confusing, negotiating a new lease can be more complicated compared with buying a car. When you are negotiating a lease there are a few guidelines to follow. Bargain down the car’s full sticker price before discussing the monthly payments. The lower the price of the vehicle, the lower the monthly payments you will have. It is important to get in writing that the total initial lease value is a certain amount and note that any manufacturer’s rebates that would apply to buying the car will also apply to the initial cost of leasing the vehicle. Also be sure that you have the lowest financing rate possible.
- car dealership 3 image by Alexey Stiop from Fotolia.com