When you reach the end of your vehicle lease, you’re at a crossroads.
You can turn in the vehicle and start a new lease. You can hand over the keys and look at buying a new or used vehicle. Or you can buy out your vehicle per the terms in your lease contract.
Historically, doing a lease buyout rarely has been the optimal choice. But the last few years have been strange for many marketplaces, including the auto market.
How do you decide whether to buy a leased vehicle when the lease ends? That’s what a listener of the Clark Howard Podcast recently asked.
Should I Buy My Leased Vehicle When the Lease Ends?
I’m leasing a vehicle. Should I buy it when the lease runs out?
That’s what a listener asked on the July 24 podcast.
Asked Eileen in New York: “When a car lease is up, how do you decide if you should purchase the car or just turn it in?”
The first thing you should do is figure out whether you love the car and want to continue driving it. You also need to know the cost to buy out the vehicle per the terms of your lease contract and how much your vehicle would fetch on the open market if you sold it.
You can check vehicle values at Edmunds.com, KBB.com and NADA.com.
Right now, Clark says, the value of the vehicle on the market typically is thousands of dollars more than your “residual” (more on that later).
“What I reccomend — first, I don’t know if you’d like to continue driving the vehicle. If you’ve really liked it and what you would pay for it is a lot less than [the market value], you absolutely want to buy it,” Clark says.
“But if you don’t want to keep driving it, what you want to do is [research] what it’s worth. And see if you can pay the residual and make a substantial markup turning around and selling it yourself.
“In the conditions of the last two-and-a-half years, the answer usually is that you will make a fair amount of money to a lot of money if you pay off that residual [and sell the vehicle]. And then you’re a car salesperson temporarily, selling it off to whoever will pay you the most money.”
What Is Residual Value for a Leased Vehicle?
A typical lease offer comes with a few components:
- Sticker price. This is the MSRP of a leased vehicle. Just like when you buy a new or used car, you can negotiate this price.
- Lease terms. This stipulates how many months you’ll keep the vehicle, how much you’ll pay each month and your mileage allowance.
- Mileage allowance. If you drive more than the contract stipulates, you’ll have to pay more when the lease ends.
- Residual value. The value of your leased vehicle at the end of your lease contract.
The lending institution that issues your lease contract will determine how much the initial value of the vehicle will depreciate by the end of your lease. For example, if the sticker price of the vehicle is $50,000 and your residual is 50% after 36 months, your residual value is $25,000.
Pay the $25,000 and you now own the vehicle.
If your car is worth more than the residual value as stated in the lease contract when your term ends, congratulations. You have what’s called “lease equity.”
That’s when the vehicle is worth more than what you’d have to pay to own it. And that’s what Clark says is happening consistently right now.
Final Thoughts
If you’re reaching the end of a vehicle lease, chances are you’ve won the lease lottery.
Check the residual value of your lease. Then check the marketplace to see what the vehicle is worth. Chances are there will be a gap. And it should be in your favor.
Love the car and want to keep it? No problem.
Don’t want the car anymore? Make sure you consider selling for what could be a tidy profit before simply turning the keys into the dealership.
