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Can You Trade in a Leased Car?


Can you trade in a leased car? This question is best asked and answered before engraving your signature on a lease contract. Here’s why: First, a leased car is not yours to do with as you please. Second, there is a significant difference between leasing and financing with a traditional loan.

Leasing is basically long-term renting. The leasing company flat-out owns the car and leases it to you for a certain period (usually two to four years). The good news is that you can return the vehicle and walk away when the lease term ends.

The tradeoff is that you have no right of ownership. In other words, your options for disposing of the leased vehicle are roughly zero during the lease term. On the other hand, there is some wiggle room. Read on to see what your options are.

RELATED STORIES: Pros and Cons of Leasing a Car

What Is Leasing?

Leasing is a financing option for acquiring a new car. A leasing company purchases the vehicle from the dealer and rents it to you for a fixed amount of time (the lease term). As with a traditional loan, you must pay an agreed-upon amount to the leasing company each month for the length of the lease term.

How Much Is a Monthly Lease Payment?

Unlike traditional new-car loan financing, when you are paying each month toward ownership, with leasing, you are simply paying for the use of the vehicle. Therefore, calculating the monthly payment for a loan and a lease is radically different.

Historically, a monthly leasing payment will be smaller than a traditional loan installment because you are only paying for the value the vehicle loses during the lease.

Calculating a lease payment is more complicated than monthly payments for traditional financing. However, there are only two leasing terms your need to understand leasing payments: depreciation and residual.

Over time, vehicles lose value or depreciate. When a car is new, it may depreciate by 20% or more during the first year. Although the percentage of depreciation slows in the following years, the value continues to decline year after year.

Depreciation never enters into computing a loan payment. However, it is the key to figuring out the monthly lease payment. The residual is the amount your vehicle will be worth at the end of the lease term. For example, for a lease term of two years, the residual equals the original value when new minus two years of depreciation. The basis for the monthly lease payment is the initial transaction price (“capitalized cost” in lease terminology) plus interest minus the vehicle’s residual value.

At the successful conclusion of the lease, you have no further obligation, but neither do you own the car.

Note: The residual value stated in the lease contract is also the guaranteed price if you choose to buy the vehicle once the lease terminates.

How Is Trading in a Leased Car Different?

New cars in a dealership lot.

Whether leasing or financing, early in your relationship with the car, there are times when you will probably owe more than the vehicle is worth. In other words, you don’t have enough equity in the automobile to cover the remaining payments. Some describe it as being upside down.

You can sell or trade a financed car at any time. However, if upside down, you must settle the difference with the lender. You can do that by paying off the shortfall in cash. Or, if you’re financing another vehicle, you can add the difference into the loan for the new car — although that’s usually not the best financial move.

When you try to terminate a lease early, you have less flexibility because someone else (the leasing company) owns the car. In this case, you have no equity and also face additional early termination fees and penalties.

Turning in a leased car is considered an early termination of the lease. Furthermore, there are fees for surpassing the annual mileage limit and excessive wear-and-tear damage.

RELATED STORIES: Leasing a Car: What Type of Damage Will You Be Charged For?

Can You Trade in Your Lease?

Yes, is the quick answer. However, don’t consider trading it in unless the vehicle’s current market value (book value) exceeds the remaining payments plus any early termination fees and penalties. In a predictable market, you are upside down in a lease until the final payment because you are paying for the lost value. Consequently, when the lease terminates, you are out.

One exception is when your lease only has a few months remaining. The dealer where you acquired the vehicle, or the leasing company, may reach out offering early lease termination. The hitch here is you usually must lease or buy a new car.

Trading In a Leased Car in Today’s Market

There may be good news if you are leasing a vehicle today and pondering an early trade-in or an early termination. The current auto market is anything but predictable. Dealers are hungry for later-model used cars because the microchip shortage and supply chain issues are strangling new car inventories and sales.

When new-car sales slump, so do the number of trade-ins supplying dealers’ used-car inventories. Furthermore, many desperate new-car shoppers are emptying dealers’ inventories of certified pre-owned (CPO) vehicles and other late-model used cars. Demand is outstripping the supply of new and used vehicles alike.

RELATED STORIES: Here’s How To Return Your Leased Car During the Coronavirus Pandemic

What Parts Do Supply and Demand Play?

This supply-demand equation is a boon for those currently leasing a vehicle because demand exceeding supply translates into higher residual values.

When the leasing company set the residual value on your vehicle, it could only make an educated guess at the vehicle’s value two or more years out. In a predictable market, that estimate would be relatively close. However, as we know, the current market has not been predictable.

Therefore, odds are, the leasing company set the residual lower than your vehicle’s book value in today’s market. In other words, you may well have equity in your car, even with several lease payments remaining.

Alternatives to Trading in a Leased Car

Customer handing key fob to car dealer.

If you need to escape your lease but find you have no equity with several payments to go, you do have options.

Lease Transfer

Your contract may permit you to transfer the lease to another private party, which is not unusual. There are brokers pairing people wishing to leave their lease with people looking to assume an existing lease. LeaseTrader and SwapALease are two such online services.

Check your paperwork or contact the leasing company to determine if your lease allows you to transfer it to another person. However, as with nearly everything in leasing, there are strings. For example, your leasing company may charge a transfer fee, and the new lessee will need to have a good enough credit score to qualify for the lease. The new lessee may ask you to put up some cash to sweeten the deal.

RELATED STORIES: Best Lease Deals

Buy and Sell Your Leased Car

You may choose to buy out your lease and sell the vehicle if its current value is greater than the residual. Early termination penalties may apply. Moreover, there may be fees for buying out the lease or even purchasing the car at lease-end.

RELATED STORIES: 5 Reasons Why You Should Buy Your Leased Car

Steps to Take to Trade a Leased Vehicle

  1. Determine the current book value – To make an educated decision about whether your leased car has some equity is to determine its current fair market value. It’s also good to check local car ads to see what your year, make, and model car is selling for in your region.
  2. Total your remaining monthly payments – Figure how many months remain in your lease term and multiply by the payment amount.
  3. Establish the total of early termination fees and payments – Nearly every lease will penalize you for terminating early. There is probably an extra fee or two, as well. You should double-check your findings with the leasing company. (In a trade-in scenario, the dealer may be desperate enough for your car to assume the penalties and fees.)
  4. Do the math – If the book value of your leased car is more than the total of your remaining monthly payments and any early termination costs, you are good to go.
  5. Contact the dealer – Reach out to the dealer to make an appointment with the leasing manager. That will give the dealer time to review your lease contract before you arrive.
  6. Spruce up the vehicle – Make time to clean the car and have it in tip-top shape when you arrive at the dealer.

RELATED STORIES: What Should I Expect When I Return My Leased Car?

Questions to Ask Before Signing a Lease

Asking the right questions before signing on the dotted line can prevent a lot of heartaches if you need to terminate a lease early or trade in your leased car.

  • Where is the residual amount stated in my contract?
  • What are the early termination penalties and fees?
  • What is the per-mile overage penalty when returning a lease?
  • Can I transfer this lease to another person?
  • Are there fees for transferring the lease?
  • Are there any fees if I decide to buy the leased car?

Related Auto Leasing Stories:

FAQ

Can you trade in a leased car?

Yes, under certain conditions. There will probably be penalties and fees. Also, you need to pay the difference unless you have enough equity in the car to cover any remaining payments and early termination fees.

Is now a good time to trade in my leased car?

Now is an ideal time for many lessees to trade in a leased car because dealer used-car inventories are tight. Consequently, they are paying top dollar for cars coming off a lease.

What is a leased car’s residual value?

Residual (value) is the term leasing companies use when referring to the value of a leased car at the end of the lease. A new car begins losing value the moment you drive it off the lot. This is known as depreciation. Every year of a lease term, the car depreciates more. Whatever value the car retains at the end of the lease is the residual.

Russ Heaps
Russ Heaps is an author specializing in automotive, financial and travel news. For nearly 35 years he has covered the automotive industry for newspapers, magazines and internet websites. His resume includes The Palm Beach Post, Miami Herald, The Washington Times and numerous other daily newspapers through syndication. He edited Auto World magazine, and helped create and edit NOPI Street... Read More about Russ Heaps

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