A consumer looking to lease a vehicle is still able to trade in their current car. Trading in won’t change the overall cost of the lease, but a lessee can use the equity from the trade to reduce the monthly payment.
Paying for the Lease
It’s important to plan and budget if a borrower chooses to lease. When a borrower leases, they’re paying for the use of the vehicle for a set amount of time. Unless they buy the car at the end of the lease term, they’ll never own it. In order to understand a lease, a lessee needs to know what makes up a monthly payment: depreciation and the money factor.
Depreciation is the loss of value that occurs from normal use on any vehicle. In a lease, it’s the difference between the capitalized cost of the car – what the car is sold to the leasing company for – and the residual value at lease end. The money factor is simply another word for interest rate.
Down Payments aren’t Necessary
Down payments are designed to help a borrower save money over time when they finance a vehicle. When a borrower buys a car, a down payment is used to not only reduce the interest charges, but also to lower the monthly payment.
When someone leases a car, a down payment usually isn’t required. Another way leasing is different from buying is that the interest charges are built into the lease up front, and putting money down won’t reduce these charges. The monthly lease payment is calculated by adding the interest charges to the vehicle’s depreciation (that is, the difference between the capitalized cost and its estimated value at the end of the lease).
The depreciation rate is also affected by the number of miles on the lease – the more miles, the higher the depreciation and the higher the monthly payment will be. Using trade equity as a down payment on a lease can lower the monthly payments by pre-paying the lease, but this won’t lower the overall interest charges.
The Bottom Line
You can use the equity in your trade-in as a down payment for a lease. Down payments can lower the monthly payment, but you won’t be saving money on interest charges. Leasing may seem attractive, but if you’re struggling with credit, it can be very difficult to qualify for one and you should consider taking out a subprime auto loan to build credit back up instead.
If you’re looking for a local dealer to work with you for your next car, CarsDirect wants to help. We work with an extensive network of special finance dealers that have lending resources available to assist people in many challenging credit situations. Take the first step by filling out our no-obligation online auto loan request form today.