Leasing a car can be a pretty good deal. You can drive around in a new model without needing to pay lots of cash upfront, and you can change cars every few years. However, in the game of vehicle leasing, there’s one rule many of us are likely to break at one point: never fall in love with your leased car.
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You know you can start another leasing contract on a brand-new car. The issue is that you don’t want a brand-new car, you want this one. Well, the good news is that leasing contracts usually give you the option of buying the vehicle before or at the end of your leasing period. Before doing that, though, you want to ensure that you have all the information necessary to make the right decision. Learning the difference between residual value vs. a buyout in a lease contract can help you understand the costs involved.
Your leased car’s residual value is the price the car dealer or leasing company estimates that it will be worth at the end of your lease period. Knowing this value, which you can find in your leasing contract, can help you decide whether buying the car is a good idea. You’ll also have to pay other costs, such as remaining lease payments, dealer fees, and taxes. The final price you’ll pay to own the car is called its buyout price.
What to Consider When Nearing the End of Your Lease Contract
Regardless of how much you like the car, you still have to make a logical decision or at least learn enough about what your options are to justify a non-logical one. These are some relevant factors you may (or may not) want to consider before making it official and registering the car to your name at the end of your leasing period.
Determine Your Car’s Lease Buyout Price and Current Market Value
As mentioned earlier, your leased car’s buyout price includes its residual value and all other payments, taxes and fees required to transfer its ownership to you. From a purely financial standpoint, deciding whether to buy out the vehicle is simply a matter of how its buyout price compares with its current market value.
Websites such as Kelley Blue Book and Edmunds offer tools to help you determine your leased car’s current market price based on relevant factors such as its make, model, and production year. These tools usually work by analyzing prices for similar models, both at used car dealers and on the open market, using this information to generate an accurate estimate. Of course, you can do this yourself by scanning the market for similar models and determining an appropriate price.
If the car’s current estimated value exceeds its buyout price, then buying it out makes sense financially. Even if you don’t plan on keeping it, you can buy it and immediately resell it for a profit. If, however, the buyout price is more than the car is worth, it may not be a good idea to buy it. Unless…
Current Inventory Shortages May Prevent You from Getting a Good Deal on a New Car
The past few years have been rough on the auto industry, mainly due to severe inventory shortages. The lack of supply meant that demand could not be fully met, which increased the price of many vehicles. Not only are cars currently more expensive, but you’re also likely to wait a few months before getting your new vehicle. Buying out your current leased vehicle may make more sense in this situation, as it spares you the hassle of dealing with these issues.
You May Be Able to Get an Extension on Your Current Lease
If you still can’t decide between returning your car to the dealer at the end of the leasing period and buying it out, an appropriate compromise may be to extend your current lease. Many leasing companies offer this option, where you’ll usually sign a contract extension for a specified number of months and continue to pay your monthly payments. New car availability may then return to normal in a few months, or you may decide that your current car is worth buying.
The Connection Between the Car’s Residual Value and Due Monthly Payments
Finding the right balance between monthly payments and residual value at the beginning of your lease contract can influence your decision at the end of it. We’ve already established that your leased car’s residual value is its estimated value to the leasing company at the end of its leasing period. This value, however, can be lower or higher depending on how much you’ve paid up to that point.
For instance, if you lease a $30,000 car with a residual value of 50%, you’ll pay $15,000 plus fees and taxes to buy it out at the end of your leasing period. If you lease the vehicle over three years, you’ll also have a monthly payment of $15,000 divided by 36, which is approximately $416 per month (excluding any taxes and fees). If the residual value was 25%, however, you’d only have to pay $7,500 plus fees and taxes, but your monthly payment would rise to $625 per month (before taxes and fees).
Deciding Between Low and High Residual Value
As with most other aspects of car leasing, deciding between low and high residual value greatly depends on your situation and preferences. Car leasers generally go for a high residual value, as this means you pay less each month as a lessee. You can use the difference to pay for other things or get a more expensive car than you could otherwise afford. Leasing an expensive car isn’t always as financially irresponsible as it sounds, as it’s more likely to retain its value than a cheaper one.
That being said, if you feel that there’s a chance you may want to keep the car at the end of its leasing period, consider choosing a vehicle with higher monthly payments and a lower residual value. While this makes your life a little harder for a while, it’s easier to pay or finance your car’s buyout price when the leasing contract ends.
Car Lease FAQs
Here are some commonly asked questions regarding car leases:
Can I Sell a Car While Leasing It?
The short answer is yes, you can sell your leased car. You may even make some money from your sale, considering the current inventory shortage. Remember, though, that you’ll face the same situation when trying to buy or lease another car, so you may not end up making a profit. If you determine that your car’s buyout price, including any additional remaining monthly payments due, is less than its market price, you have two main options for selling it:
Sell it on the open market: The first option is to find someone interested in buying your car and sell it to them. This might involve buying out your leased car and then selling it to someone or checking if your leasing company allows a third-party buyout. You can even avoid paying sales tax by asking the car dealership that sold it to you for a lease pass-through, which is a direct transfer of ownership to the buyer.
Sell it to any dealership, including the one you bought it from: The vehicle shortage is also affecting car dealers, meaning that the dealer you bought the vehicle from may buy the car from you at a good price. It may offer you cash or trade-in value; otherwise, you can buy out your lease and sell it directly to another dealership for a profit.
Can I Finance My Car Lease Buyout?
If you’ve decided to buy out your lease at the end of the contract, you don’t necessarily have to spend your own cash. Many financial institutions may be willing to finance your purchase. Consider asking multiple lenders what their rates are and getting a loan pre-approval. It’s usually a good idea to also ask the leasing company that you got the car from for their rates on a car loan but only after getting multiple other offers to use as leverage if needed.
What Other Options Do I Have When Ending My Lease?
If you don’t want to buy the car and selling it isn’t likely to bring you any profit, your main option is to simply return the car to the dealership at the end of the leasing period. Before doing so, make sure you aren’t beaching any contract clauses, such as those regarding excess mileage and wear and tear. You can also trade in your current leased car for a new one at the end of your contract, as the dealership may make you a good offer to keep you as a customer for an additional few years.
Finance & Insurance Editor
Ashley Donohoe has written professionally about business and finance since 2010 and has served as an expert reviewer since 2017. Her work has appeared on major websites such as Money.com, The Balance, and the Miami Herald. Having run her own business, she has broad expertise in taxation, financial management, accounting, and investments. Her educational background includes a B.S. in Multidisciplinary Studies, Master of Business Administration, and certifications in accounting and taxation.
Source: www.caranddriver.com