Should I Use My Trade-In As a Down Payment On A Lease?

September 11, 2020

Should I Use My Trade-In As a Down Payment On A Lease?

Shopping for a new car can be a big headache. The car options are endless and the decision to buy or lease has many pros and cons.

Leasing a car can be a great option over buying because you can often get a new car, drive it for a few years then get the option to buy it or turn it back in and leave a brand new car again.

Leasing is an especially great option for car enthusiasts who like to try the latest models or like to upgrade every few years.

When it comes to financing a new lease, it can be a toss up between trading in a current vehicle versus putting a down payment.

Most people would probably prefer to do the trade-in, but there are some negatives to this option. Yet, sometimes a down payment on a lease also might not give you the best bang for your buck. Let’s look at the pros and cons of trade-ins as a down payment on a lease.

Car Leasing 101

Leasing a car might not be an option that a lot of people are familiar with. Sure, you’ve probably heard the option to lease but what does it actually entail?

Leasing is a great way to drive brand new cars every few years without the commitment of purchasing. A lease monthly payment is also usually lower than buying with an auto loan.

However, leasing a car does mean you have some driving limitations as you can only drive your vehicle for a fixed number of miles and months.

During the time of your lease agreement, you will need to take good care of the car and follow all recommended services. The goal is to be able to return a car that the dealer can resell as used or preowned.

If the car is over the mileage or has any damage, you likely will end up paying more at the end. You can also choose to purchase your car at the end of the contract and continue to pay off the residual debt.

Essentially leasing a car is very similar to renting a home or apartment. You have a contracted amount of time you are paying.

At the end of the day, you do not really own the vehicle so that at the end of the lease you can choose to find a new vehicle or purchase the leased vehicle. Keep in mind that some dealerships have a vehicle turn-in fee if you choose not to lease a new car from the dealer.

Leasing a car often has three-year or four-year contracts, and your monthly payments will cover the depreciation of the car in that time.

You will also have to pay finance charges and just like a purchase with a loan, the better your credit score, the better your interest rate.

Often to lower a monthly lease payment, buyers might opt to put down a down payment or use their old vehicle for a trade-in.

Trade in

Many buyers who opt for a lease might choose to use their current vehicle as a down payment for their lease. It can be an easy way to get rid of a car you no longer want and also be able to put some money down on your new vehicle.

However, buyers should be aware of the pros and cons of this option.

Pros:

  • Quick and Easy – Trading in your old vehicle and putting it towards your new lease means you are essentially selling your car to the dealership.

The process begins with the car salesperson giving your car a test drive and then coming up with an appraisal value.

This offer does not go to you as a direct cash payment. Instead, the value of the car will go towards the new car you are going to lease as a down payment on the vehicle. If you accept the offer, all you have to do is sign the car’s title over to the dealership.

  • A one stop shop – Another convenient part about doing a trade-in for a lease is that the process of trade-in and driving off with a new car typically is done in one transaction and one day.

The dealer takes care of the process of the trade-in, securing a car loan if you need one, and the process of your new lease. This makes the car leasing process so much more seamless than taking care of each component yourself.

However, make sure you are negotiating the best deal out of each process. Sometimes a dealership can be more costly than doing each process yourself.

  • Your existing loan gets paid off – When doing a trade-in, you can still trade-in a vehicle that you still owe money on.

It’s quite common for dealers to take care of the old financing and will pay off the remaining loan balance on your trade-in and get the title directly from the lender. If you have any positive equity, it will be used as the down payment towards your new lease.
This is often a common reason why buyers would opt for a trade-in for a new lease. If you know for sure that you have positive equity on your old vehicle, then using your trade-in as a down payment can be a very good way to get rid of your old vehicle and put some money down on your new vehicle.

  • Save on sales tax – Often your trade-in value will be subtracted from the new car’s price and thus you can receive a lower sales tax.

For example, let’s say your new car will cost you about $35,000. The dealer offers you $15,000 for your trade in. The cost of your new car will then be $20,000. You do need to check your state’s sales tax laws, but this should mean that you will pay sales tax on the $20,000 instead of the overall value of $35,000.

Cons:

  • You might not be getting the best deal – A trade-in with a dealer usually is only offering you the wholesale value of your old vehicle. You might be able to get more if you were to sell your car yourself to a private buyer.

However, selling a vehicle yourself takes a lot more work and can take some significant time.

  • You could end up owing more – A trade-in option for a new lease can be a great way to transition into a new car. However, this might not be the best option if you owe more on the vehicle than it is worth.

Negative equity can make the process a little more difficult and costly. You might need to have the money to pay off the remainder of your loan that the dealer’s trade-in value does not cover.

If you do not have that amount, you do have the option of stacking that remainder of the loan on to your new lease. However, that can be a financial headache as you are essentially still paying for two cars but driving one.

Preparing To Trade-In

Getting the best price from a trade-in means making sure you prepare your car just like you would when you sell it privately. Here are some things to prepare before you trade-in your vehicle:

  • Prep your paperwork – While you don’t need to have your car repaired to trade-in your car, it is a good idea to bring in any records that show any maintenance you had done while you owned it. This can help increase the amount in your trade-in offer.
  • Clean it up – While you do not have to clean out a vehicle before trading it in, it can help make your car appear more taken care of. You also want to clear out any information in the car’s technology such as a navigation system or bluetooth connection.
  • Know your car’s value – It is always best to know beforehand what the estimated value of your car is before going to the dealership and accept any offers. This will help you gauge whether or not you are receiving a fair deal.
  • Pay parking tickets – Parking tickets do not just go away when you sell your vehicle. In fact, unpaid parking tickets can prevent the title from being transferred. Make sure to take care of any outstanding tickets before even going to the dealership to help make the process go smoother.

The bottom line

Ultimately, doing a trade-in can be a great option to get rid of an old vehicle and drive off with a new vehicle all in the same day. Really it will depend on how much you still owe on your old vehicle and how well taken care of it is.

A trade-in for a lease can help make the car buying process go by much smoother and easier. However, keep in mind that what you trade for convenience might mean you are not getting the best deal or value for your old vehicle.

It is always best to also shop around for your new vehicle before even heading to the dealership. It is important to do your research on a vehicle before you even go to a dealership in person.

A great way to inspect a car before even heading to a showroom is to visit a virtual showroom.

Many dealerships are partnering with AI companies such as RelayCars to help buyers get a better shopping experience.

You can view the exterior and interior of your potential new ride before even going to the dealership. You can closely inspect in-car features and even choose the colors you want.

Shopping for a new car whether you are looking to lease or actually buy does take quite a bit of research and homework. You want to make sure you are getting the best deal for both your trade-in and your new lease.