Can You Trade a Car You Are Financing for a Leased Car?
As It Turns Out, Trading Financed Cars For Leased Ones Is possible
Yes, you can trade a financed vehicle for one you lease. There are some details to consider so you understand why, how, and whether or not going this route makes sense to you. First let's understand the difference between financing and leasing.
When you finance, you put a down payment against the principle cost of the vehicle. Say you've got a car worth $30k, and you put $5k down when you sign the financing papers. From there, you pay off the other $25k car loan in monthly increments.
The average car payment is right around $500, so you're looking at about $6k a year before interest. So you'd be paying that car down for four years and two months before interest is factored in. This situation is financing.
In terms of leasing, you're looking a at a similar situation, but the chief difference is you're not paying to own the vehicle, so you're not putting equity into it. You're "renting" the car. You'll have to put a downpayment on it, and you'll have a set time (or a set mileage) to use the vehicle in. It will depend on the leasing agency.
Generally, what you pay a month for a leased car is going to be less than what you would pay in a financing situation. You're not working toward ownership, though. You're just retaining use of the vehicle. Here's the advantage: since you don't own it, if you can't pay, you're not on the hook for the remaining cost as you would be were you financing. There's also this to consider: depreciation.
The Argument For A Leased Vehicle
A car purchased that is $30k in value will depreciate steadily over the course of five years. In five years, your vehicle -- if purchased new -- loses 60% of its value. So a car purchased for $30k is only worth $10k after five years. But at 5.47% interest, you've paid about another $5k, meaning over the course of five years, on a $30k car you pay $35k, and the vehicle you have left is only a $10k value. If you sold it for $10k, it would be like you paid $25k for the privilege of driving the vehicle over 5 years, or $5k a year.
So leasing might not be a bad idea. If you're paying less than $500 a month, and you drive it five years, you're only really out $83.33 in equity a month. Accordingly, trades are totally possible, because those who manage financing and leased vehicles understand that there's money to be made in terms of convenience from leasing vehicles to people.
Where the real value comes is in how much you pay for a leased car. If you're paying $400 a month for it, in 5 years you've spent $24k. You've saved about $10k over going the financing route. That's basically the value of a car you've financed over five years; but with interest you over pay, so in reality it's only $5k of equity. Basically, you've spent less and lost less without having to be on the hook for debt. It's a good way to drive a new vehicle.
How The Trade Works
So how exactly does making a trade work? Well, if you've got a financed vehicle, depending on depreciation and how far along you are in terms of equity, you can basically just turn that equity into the lease trade. If you've got enough equity on your vehicle, that's a downpayment, and may even cover a few months of the lease, depending on the leasing group.
If you don't have equity in the vehicle, then doing a lease trade doesn't make much sense, because you'll still have a down payment. So if you're considering doing the trade, it's worth it if you have equity greater than the lease downpayment. In that scenario, you're just switching who you pay your monthly expense to, and you can likely save money on a lease car payment.