Is it a Good Idea to Trade in a Car You’re Upside Down on for a Lease?

Being upside down on a car loan means you owe more on the car than what it’s worth. That’s a terrible position to be in because if you sold the car while being upside down, you’d still owe your lender money. People typically get upside down when they take out extra-long car loans, which are anything over 42 months, according to consumer reporter Clark Howard, or when they put no money down when they buy a car. You do have options, however.

Trading for Lease is a Bad Idea

Trading in a car that you are upside down on for a lease might seem like a good idea. It stops you from making additional payments on the car you’re upside down on, but it doesn’t solve the problem of what you owe. What the dealer usually does with a negative equity trade-in is add the amount you owe to your lease payments, which makes your lease payments higher. If you don’t make higher payments, you will still owe on the deal after your lease is up.

3 Better Options

1. Pay off the loan. Probably the best thing you can do when upside down on a car loan is to pay it off. Try to pay more each month than your payment amount to get right side up on the loan faster.
2. Refinance. Another idea is to try to refinance the loan if your current loan has a high interest rate. You’d do that by going to a firm that refinances auto loans or by checking with your bank or credit union. If you qualify for a loan with a lower interest rate, get it and use it to pay off the original lender. You should be able to pay off the new loan faster with a lower interest rate.
3. Sell. Consider this option only if you can’t afford to make the car payments anymore. It’s still better to sell to a private party than to trade your car in for a new car or a lease because you’ll probably get more for the car that way.