Leasing has become a popular alternative to car buying. You get a new car, drive it for a few years, and have the option to buy it or turn it back in and lease again. People want the best deal possible whether they’re financing or leasing, and trading in their current vehicle to use as a down payment is a popular option. But does it make sense to use your trade-in if you’re leasing?
Car Leasing Basics
Leasing isn’t the same as buying. Unless you purchase the vehicle at the end of the term, you’ll never own your leased vehicle. When you lease, you pick either a closed-end or open-end lease. The most common is a closed-end lease or a “walk away lease”, where you agree to return the leased vehicle in good condition when the term is up and the leasing company guarantees the residual value. An open-end lease, or a “finance lease,” is where you guarantee the residual value of the vehicle. This means you’ll need to come up with the money needed to buy it, finance the balance, or make up the difference if it’s worth less than the residual value at lease end.
To determine how much you’ll be paying for the lease begins with knowing what goes into it. Two things determine the monthly payment:
- Depreciation – Difference between MSRP and the vehicle’s residual value.
- Money factor – Another word for interest rate in leasing.
The capitalized cost includes the vehicle’s selling price and any inception fees (leasing company fees and title and license fees).
The Truth is…
A down payment typically isn’t needed, or even required, when you lease. Down payments are frequently needed when buying a car in order to get the most money out of the vehicle. A down payment is used to lower monthly payments and decrease interest charges. With leasing, these big money factors aren’t as big of an issue.
Monthly payments are partly based on the amount of miles put into the lease. The more miles built into the lease, the higher the monthly payment. While a down payment can decrease monthly payments, you won’t be saving more money because all you’re doing is pre-paying the depreciation and interest charges, not reducing them or saving any money.
But Can I Still Trade in My Vehicle?
The simple answer is yes, you can still trade in your vehicle to pre-pay a lease. It’s highly unlikely a dealer will refuse a trade-in, but make sure you do some research beforehand. Check with sites like Kelley Blue Book and NADA to see what your vehicle’s trade-in value should be, and negotiate with the lender to get the best deal possible for the leased vehicle.
The Bottom Line
If you need a vehicle but bad credit has you worried, you probably won’t qualify for a lease, Auto Credit Express has a solution. We connect car buyers with local special finance dealers who have the lenders available to work with unique credit situations. Take the first step and fill out our free auto loan request form today.