Can I lease a car if I have a upside down loan on my trade vehicle?
Being upside down on a car loan means having no trade value to use in buying or leasing another car. In fact, it means you must somehow pay off the remainder of your loan after a dealer gives you credit for the value of your trade vehicle.
Your options depend on just how much you are upside down — the difference between what you owe and the trade value of your vehicle.
If that difference (negative equity) is large in relation to the price of the new vehicle, your options are much more limited than if the difference is smaller.
As a rough guideline, if your negative equity is more than about 10 percent of the price of the new car, you will almost certainly have to come up with cash to pay it off.
If it’s less than 10%, a dealer may be able to “roll” the negative equity into the new car lease. He’ll depend on his lease financing partner to get it approved. For such relatively small amounts of negative equity, leasing is a good way to pay it off, as opposed to buying with a loan. See our article Leasing to Hide Negative Equity for more details.
What are the potential problems of leasing a car and trading with an upside down loan?
As mentioned earlier, the trade might not even be possible if you are significantly upside down (“under water”). The amount can be too large for a lease finance company to accept. The only option in that case is to have the cash to fully pay off the old loan.
If you are not significantly upside down and the price of the new car is great enough, you may be able to do the trade without additional cash. However, since you will be be upside down in your new lease (which is not unusual), make sure you have GAP insurance to cover your lease balance if your vehicle is ever stolen or totaled in an accident.
Including a relatively small amount of negative equity in a new lease will increase your monthly payments, but not by a great amount.
Even though leasing is an attractive way of trading with an upside down loan, make sure leasing is right for you. You should know that leases come with mileage restrictions and extra fees. For more details, read our Lease Guide.