Trading In A Finance or Lease Early Means
Double Dipping on Payments
Published in the Serious Buyer, Serious Seller Eletter, January 18, 2011, Written by Viraf Baliwalla
I can't believe the number of people that I speak to these days that make the costly emotional mistake of trading in a vehicle before the end of their finance or lease contract. In defense of some, their needs change and the old vehicle will no longer do. In that case, it is perfectly understandable - things happen. For example, if you buy a two door coupe and then have kids, you will now most likely need a four door vehicle. Forget the 4 door, you may as well just take the plunge into a minivan.
However, it is quite surprising how many people, often who don't have the money to burn, are coerced into switching vehicles without understanding the financial consequences. I see it all the time. It's like that tv show "Till Debt Do Us Part" where the host starts to dig into the reasons why people are spending so much unnecessarily and building up huge debt.
When you sign a contract for a fixed term, be it a lease or a finance, your monthly payments are calculated based on that term, say 48 months. If after 24 or 36 months, you get bored of the vehicle or are enchanted by the new design of the next model year and want to upgrade, you cannot forsake the obligations of the old contract. The financing company wants the full amount of their money.
I have heard stories from many people who were just browsing in the showroom while in for service. A sales rep sees them gazing fondly at a new vehicle, approaches and starts chatting them up. "But I'm in an existing contract" they say. "Not a problem" the sales rep responds, "we will pay out the balance of the contract. All you have to do is sign a new one". Gotch'ya!
So what just happened here? What didn't they tell you?
The answer is - your remaining payments will be built into your new payments. Described another way, the finance company will be double dipping into your pocket for the period of overlap, charging you for the first contract as well the second. Unfortunately, with your new payment you will be paying on two vehicles but only driving one.
If you have money to burn and want to burn it on a newer vehicle, all the power to you. But for most people in this "negative equity" situation, we recommend that you walk away for a while. Sleep on it. In the morning, if you still feel it is necessary to upgrade, then go for it. However, my instincts tell me that in the morning you'll say "wow, what was I thinking".
About the author: Viraf Baliwalla, President of Automall Network (and a few other companies), is a consumer advocate and believes in helping people spend their money wisely. He is an expert in car buying and has relationships with dealerships around North America. You can reach Viraf at viraf@AutomallNetwork.com or (416) 249-5474 x303.
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