Can I trade my current car to lease a new car?
Certainly.
Trading a car works the same whether you buy or lease your next car. However, the effect of a trade on a lease deal is a bit different than with a purchase deal. Let’s see how.
Trading has a more significant effect when leasing your next car
As you probably know, when you trade a vehicle to a dealer, the value of that vehicle is applied as a down payment on your next vehicle. The effect of that down payment (cap cost reduction, in leasing) serves to reduce the cost of your new vehicle and lowers your monthly payment, whether leasing or buying. However, with leasing, the effect is more significant, meaning that it lowers your monthly payment by a greater relative amount.
Let’s take a look at an example in which we compare the effect of a down payment (or trade credit) on monthly payment for both a financed purchase and a lease.
Example
Assume our new car is priced at $35,000. Our loan rate will be 4.5% APR and our term will be 36 months. Our lease rate is 4.5% (.0019 lease money factor) and our residual is a typical 50% of MSRP ($17,500) for 36 months.
Before any down payment or trade credit is applied, our payments would be as follows:
LOAN — $1041 / month
LEASE — $585 / month
Now, let’s assume we’re trading a paid-off vehicle that is worth $8,000 to the dealer. He’ll apply it as a down payment (cap cost reduction, in leasing). Let’s look at how this affects our loan and lease payments.
LOAN — $744 / month
LEASE — $288 / month
With a purchase loan, by having a trade-in vehicle, we reduced our monthly payment by $297.
With a lease, we reduced our monthly payment by $297, exactly the same dollar amount as with our loan.
(Note: The dollar amount of the reduction is not always exactly the same as in our example here)
However, the lease payment reduction is a whopping 51% of the payment without the trade credit, while the loan payment was only reduced by 29%. We cut our lease payment in half but cut our loan payment by less than a third.
Therefore, we can now see that the effect of a down payment or trade credit is significantly greater when leasing. You simply get more bang for your trade bucks when leasing than when buying with a loan.
What if I still owe money on my trade vehicle?
If you still have a loan on the vehicle you intend to trade, the effect on your new car lease payments depends on whether you are “upside down” or not. If you owe more than a dealer is willing to offer you as trade credit, you are upside down and have negative equity. This means your new car lease payment will actually go up, not down, assuming your negative equity is not too large and the dealer is able to roll it into your new lease. If the dealer is not able to include it in your new lease, you’ll have to add at least enough cash down payment to offset the deficiency.
If your trade vehicle is worth more than you still owe, the difference is considered positive equity and your dealer will give you trade credit for that amount, which will reduce your new car’s monthly lease payment, but maybe not very much depending on the amount of that credit. Of course you can always add cash to the deal, which will reduce your monthly payment even more.
What if the value of my trade vehicle completely pays for the lease?
In this case, your lease will be a single-pay lease or pre-paid lease (see Single Payment Car Lease Explained). You’ll have no monthly payments and you may get cash back from the dealer.
Summary
Trading a vehicle for a new car lease has a much greater effect on monthly payments than when trading for a financed purchase. If you still owe money on your trade vehicle, the deal can be more complicated and possibly not in your favor. If your trade vehicle has great value, it may pay for most or all of your lease.