How to Trade in Your Car and Lease New

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With the average new vehicle costing around $36,000, consumers are leasing cars and trucks at a record pace to help keep their payments affordable. Leases now account for around 30 percent of all new car or truck transactions.

If you’re considering trading in your current vehicle and leasing a new one, you may be tempted to make as large a down payment as possible on it, as one might do when buying and financing a car. Here’s why that may not be a good idea.

Leasing Essentials

For starters, know that leasing a car is not the same as buying and financing one. A lease is essentially an extended rental that usually runs from 24 to 39 months. Monthly payments are based primarily on the difference between a vehicle’s transaction price (including taxes and fees) and what it’s expected to be worth at the end of the lease contract, which is called its residual value. That amount, minus any down payment, is financed at a set interest rate, which is also called the money factor in leasing lingo.

When the lease is up, you can either simply return the vehicle to the dealer or leasing company, or purchase it at a predetermined price. If the predicted residual value ends up being less than what the vehicle is actually worth at the end of the term, you can earn some cash by purchasing the car and selling it to another party at a profit.

While leasing guarantees you’ll be making perpetual car payments, they’re lower than with conventional financing. On the downside, leases come with strict mileage limits. Exceed them, and per-mile penalties will add up quickly. Likewise, you’ll be charged an excess-wear-and-tear fee if you return the vehicle in sub-par shape. You’ll likely also face an acquisition fee of a few hundred dollars up front, and a disposition fee at the end of the term.

Working the Numbers

All else being equal, making a larger down payment will result in lower monthly lease payments. The down payment usually consists of the first month’s installment and a capitalized cost reduction that decreases the amount being financed. This is usually referred to in automakers’ ads as cash due at signing. If you have good credit, you will usually be able to lease a car with zero cash paid upfront, but your payments will be higher.

Here’s an example of how a down payment affects leasing terms: We found two advertised lease deals for the same $25,000 vehicle. Not including taxes and fees, one was at $199 a month for 36 months with $2,999 due at signing. The second was quoted at $289 a month with zero down. Choosing the zero-down deal keeps that $2,999 in your pocket. Still, this deal costs an additional $90 a month.

Should You Use Your Car’s Trade-in Value as a Down Payment?

If you’re cash-strapped and are trading in an older car that’s only worth a couple thousand dollars, it might make sense to use the proceeds as a down payment to keep your lease payments affordable. On the other hand, you may not want to do this if your trade-in is worth considerably more.

If you’re financing a new vehicle, making a bigger down payment increases your equity in it. This helps to ensure you won’t wind up owing more money than the vehicle is worth. If the vehicle’s book value is less than you owe on the car loan and the vehicle is stolen or totaled, you’ll owe the bank the difference between what the insurance company will give you and the outstanding loan balance.

By contrast, a down payment on a lease is merely an advance payment on the deal. Many leases have gap insurance built into the contract. If the vehicle is stolen or totaled, this insurance pays the difference between its book value and the amount owed on the lease. You will not, however, get back your down payment.

Some would suggest it’s best not to make a down payment at all. Paying a large amount of cash up front on a lease tends to defeat its advantage as a money-saver. You may be able to come out ahead by instead investing the amount, or using it to settle other debt. Plus, in many states, you’ll have to pay sales tax on the amount due at signing. You’ll have to pay tax on the deal regardless, but avoiding the down payment means you’ll spread it evenly across your monthly installments.

Many personal finance websites have calculators that will determine monthly lease payments based on the size of your down payment, the purchase price, number of payments, sales tax rate, current interest rate and the vehicle’s expected residual value. As you run the numbers, be sure to determine your total long-term costs by multiplying the monthly payment by the number of installments and adding the down payment, if any, along with other applicable expenses.

Editor’s note: This article was originally published in January 2015. It has been completely updated for accuracy and comprehensiveness. 

By | 2018-10-24T20:59:13+00:00 October 11th, 2018|Car Buying|48 Comments

48 Comments

  1. Tamoka Putmon October 21, 2015 at 10:28 am - Reply

    Can I use my trade in as a down payment?

    • Lynn Massicotte March 2, 2016 at 10:03 pm - Reply

      Can I trade in my jaguar 2002 for a used car or a new lease

    • Chris August 25, 2016 at 8:21 pm - Reply

      My lease will be up August 2017. I would like to continue to lease. My question is, will I need to put another down payment on the new car I’ll be leasing?

      • Debbie Patrick January 20, 2017 at 7:08 pm - Reply

        We are currently leasing a 2015 Rav 4 and would like to switch to a new Tacoma, we paid $3000.00 down at the time of the lease signing, will we need a down payment on the Tacoma?

        • Esteban Rincon April 13, 2017 at 11:05 pm - Reply

          If you want lowered payments then, yeah

        • Fiona Brown May 2, 2018 at 12:19 pm - Reply

          I had a car it broke down so I got a trade in for a down deposit on a car

      • Carol February 15, 2017 at 3:31 pm - Reply

        We just turned in our 2014 Cr-V for a 2017 HR-V. But I don’t like it, can I turn it in on a new Jeep lease! What would that involve?

    • DAWG November 2, 2016 at 2:07 pm - Reply

      YES

    • Tonya Romeeo October 29, 2018 at 9:17 pm - Reply

      I would love to trade in my 2000 Astro Chevrolet for a down payment on a other use car I really need a smaller size it just me and my friend

  2. Irene burns November 6, 2015 at 5:48 pm - Reply

    I want to trade my 98 cutlass in for a use car

  3. Debbie Bilbo December 13, 2015 at 11:02 am - Reply

    I have a 2015 Kia Optima with less than 8900 miles but I am upside down in the vehicle… .would it be possible for me to lease…thx

    • Paula January 11, 2016 at 8:34 pm - Reply

      I also have a 2014 vehichle I have that I’m upside down with and too was wondering if this is possible to trade in for lease

    • Juan February 12, 2016 at 4:38 pm - Reply

      I too have the same question have they reply to you

      • Richard Spencer March 2, 2016 at 4:38 pm - Reply

        I owe a small amount above what my truck is worth I’d like to lease an ecomical car what would you advise ?

  4. Anna January 4, 2016 at 3:13 pm - Reply

    I would like to trade my car in if that possible

  5. Anthony January 25, 2016 at 1:05 am - Reply

    Can I trade in my 2003 grand Marquis

  6. Thomas February 28, 2016 at 7:26 pm - Reply

    I want to trade my 1999 ford explorer for a newer car

  7. michael archer March 5, 2016 at 6:47 am - Reply

    want to trade my 2004 truck 4 wheel drive f-150 x-cab its black

  8. Victoria March 7, 2016 at 9:22 am - Reply

    I have a 2008 Honda Civic EX with 93,000 miles. However, Honda just put in a brand new motor, a brand new clutch, and I just got a brand new ac. I want to trade it in to purchase something else but I want my payments relatively low. I don’t want to lease and my credit is very good. Options with no money down?

  9. Kathleen March 10, 2016 at 11:11 am - Reply

    I leased a 2016 Santa Fe in Dec 2016 now have 1300 miles on it don’t like it realize I wanted a all 4 drive car this is a 2 wheel is there some way other than paying it off to trade it for other car?

  10. Paul empty May 20, 2016 at 2:52 am - Reply

    I have a car on finance can I get a lease?

  11. Jean June 26, 2016 at 2:52 pm - Reply

    I am trying to figure out if there is a formula for how much each $1000 in trade-in value reduces a lease payment?

  12. ray June 27, 2016 at 8:10 am - Reply

    I’m thinking of leasing.what happens after the lease is over,and you want a new car.do you have to put another down payment or what?

  13. JR September 20, 2016 at 2:15 pm - Reply

    I have a 2015 Audi A3 with 1 more year left on the lease. The car has 33,400 miles. My work commute has gotten longer as we recently relocated our facilities. I’m looking to get a more fuel efficient car and don’t mind leasing or buying. I want to get the new Chevy Volt. I have several friends who drive a Volt and have nothing but great things to say not to mention the amount of gas money saved. Can I trade in my Audi to Chevy? What sort of penalties can I expect?

    • Ray Hull April 11, 2017 at 2:42 am - Reply

      Roughly 35$ per 1000

  14. George September 23, 2016 at 9:42 am - Reply

    If I trade in a car and have $12000 equity in the car and only want to use part of that as a down payment for a lease. Do I get cash back for the difference?

    • Dona gavin October 2, 2016 at 2:54 pm - Reply

      2013 veloster 25k mi. Want to buy or lease a Honda CR-V
      Best way to go?

  15. Emily September 26, 2016 at 8:08 am - Reply

    My name is Emily I want to trade my 1998 dodge intrepid es for a used car

  16. Rod October 15, 2016 at 8:47 pm - Reply

    I have a 2008 Nissan Altima SL 4door 74300 miles I still own 8400, want to trade in for a 2014 _ 2015 SUV 7 passenger, with no money down,. Is this realistic and double, with out going broke
    ?
    ,

  17. Lynn October 24, 2016 at 11:14 pm - Reply

    I have a 2016 Saraha Jeep & leased in June of this year. I put 8300 as a Down Payment so I could get a low monthly paymently. Can I now turn that in an lease a Grand Limited? Also would I have to put more money down? How do they determine the credit score & where do they get it? I have good credit but it only came in at 690? Thank You.

  18. Mary December 30, 2016 at 12:36 am - Reply

    Can you trade in 2 cars for one car to lease

  19. Brandon Thao January 19, 2017 at 3:31 pm - Reply

    Let’s say i down $5,000 on a lease. Will it go towards the car at the end of my lease if i decide to buy it?

  20. Antonio Ramirez March 14, 2017 at 9:21 pm - Reply

    I have a VW Jetta & low mileage, I am financing it; I want to turn it in and get a small SUV

  21. Www.Facebook.Com October 22, 2017 at 3:34 pm - Reply

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  22. Carmen April 18, 2018 at 5:43 pm - Reply

    I have a 2017 Chevy Malibu that I am financing, and I don’t like it. Can I trade in for a lease or how does that work?

  23. Brooke June 21, 2018 at 11:33 pm - Reply

    I’m currently making payments on my vehicle and have only had it two years. Since its owned by a third party, what are my options and am I able to trade in to a newer car or lease?

  24. Carlos G Ruiz June 24, 2018 at 6:27 pm - Reply

    I have a 2014 Honda Pilot 52000 miles. Bal $21,500.
    I want it to trade it in for a Lease. Can I get some advise. I purchased the car originally with 24,000.

    • Tony C July 16, 2018 at 7:14 pm - Reply

      carlos sry to inform you, your 2014 pilot wasn’t worth $21,500 new

  25. Denise July 2, 2018 at 10:00 pm - Reply

    I have 2017 Honda I wanted to trade it in for a 2018 Toyota but I was told the amount they payoff goes on on the balance of the Toyota is that true not making since

  26. Colleen July 3, 2018 at 4:11 am - Reply

    I have a 2005 Chevy Malibu Max’s and it’s broke down can I trade that in for another car at the used dealership I got this one at?

  27. Chris H. August 12, 2018 at 5:11 pm - Reply

    I have a 2016 Honda Accord EX with a payoff of $1989.00. The residual value of the Honda is $15, 750. I would like to get a zero down lease on a 2018 Subaru Legacy. How will that work?

  28. Rusher Coleman August 13, 2018 at 11:23 pm - Reply

    Do you lease without trade in?

  29. Tom Macmanus August 18, 2018 at 2:32 pm - Reply

    Excellent review of all the options – where are Is your closest location to me – I live in zip 29585 – Tom

  30. Ellen nifo September 19, 2018 at 4:59 am - Reply

    Hey just a quick question I want to trade my Ford territory 2005 for a new 7 seater can I put my old car as a down payment for my next car

  31. Lisa October 13, 2018 at 8:18 pm - Reply

    i own my car and want to trade it in and lease my next car. I have $13,000 equity in my current car and only want to use a small amount for a down payment. Do I get the difference in cash?

  32. Mel D October 13, 2018 at 9:23 pm - Reply

    Im upside down $6000 on my current car. How can I get out of it with a lease. I want a new car

  33. Sharon October 20, 2018 at 3:16 am - Reply

    I have 16 months left on my 3 year lease, can I trade it in on a new lease now

  34. Debra Bowannie November 15, 2018 at 3:26 pm - Reply

    Can I use the car title as a down payment for a trade in

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