If you have a car lease that’s close to running out, you could be in for a pleasant surprise. Right now, many cars coming off of leases are worth more than their residual value (the payoff due).
That means if you like the car and it’s been trouble-free, you may want to consider buying it.
“In some cases, you could buy your car and possibly save as much as $3,500 in the transaction,” says Phillip Reed, senior consumer advice editor for Edmunds.com.
Matt Mawer, a Seattle-area architect, just bought his 2008 Cadillac SRS when it came off lease. With a residual payment of almost $30,000 he had no intention of buying it when he took it back to the dealer.
“I was very surprised,” Mawer says. “We honestly could not find a similar car that was used, low mileage and 2008 or newer for that price. We liked the car and obviously knew its history. It just turned out that buying the car we already had really made the most sense.”
Mawer’s dealer, Brad Brotherton of Brotherton Cadillac, tells me about 20 percent of his customers buy their cars at the end of the lease. At some dealers it’s around 30 percent.
Why is this happening? It’s a result of the poor economy.
During the recession, many people stopped leasing and bought used vehicles. That means fewer cars are coming off lease right now. But demand for used vehicles remains strong. The lack of supply has driven up prices for low-mileage pre-owed cars and trucks.
No one expected used car prices to be this high. So a residual value set three years ago is likely to be lower than the car is worth today. The experts at Edmunds.com say the spread between the residual value and the market value is now at a level never seen before.
Determining your leased car’s value
Before you turn in your keys, do yourself a favor. Find the residual value in your lease contract. Then look up the vehicle’s current value on a used car pricing website, such as Edmunds, Kelley Blue Book, and NADA Guides.
If the residual is lower than the market value, you have equity that you can use to your advantage if you want to buy the car. And if you decide to buy, try to negotiate a price even lower than the residual in your contract.
“Don’t hesitate to make an offer anywhere from 10 to 15 percent below that price,” suggests Jack Gillis, author of The Car Book 2011. “There’s a good chance the leasing company will accept it because there’s a lot less paperwork involved and it’s a lot easier than trying to turn that vehicle around to sell.”
Other options
If you don’t want to buy the car, you can apply your equity to a new lease.
Lawrie Robertson of Seattle did an early return on his 2009 Acura MDX because the dealer offered what he calls “amazing lease terms” on a brand new model. His payments are now $100 a month less and he’s driving a brand new car.
Frank Kelley, general sales manager of the Acura of Bellevue, made Robertson that offer.
“We’re seeing people come in and get a brand new car — and lowering their payment, sometimes significantly from what they had before because their equity is so great,” Kelley says. “Where last time they put nothing down, now they have thousands to put down on another vehicle.”
You could also choose to sell your leased car to the dealer. Dealers need low-mileage used vehicles. So right now they are often willing to pay more than the residual value, especially if the car is in good condition and within the mileage allowance.
Oren Weintraub, president of Authority Auto, a car buying and leasing service in Sherman Oaks, Calif., says it’s a lot easier than you might think.
“We’re having the dealers buy the car and pay off the lease for the consumer,” he says. “When the dealer receives title for the car, they send the customer the equity check.”
Authority Auto helped Andy Howard of Brentwood do that when the lease on his wife’s Lexus GX 470 was almost up. The buyout in the contract was $26,000. The dealer offered $30,500. Andy says that check for $4,500 was a complete surprise.
“I saw the car on the dealer’s website a week later and it was gone within two days,” Andy tells me. “And the dealer made a profit on it.”
My two cents
These are all good options if you have an expiring lease and need to decide what to do next. Just remember, in most cases you are better off if you buy your next vehicle rather than lease. Consumer advocates agree that’s usually the lowest cost option in the long run.