As the final months of your car lease tick down, your decision is to buy your leased car or turn it in. In fact, the leasing company, or the dealer where you leased it, is probably already bugging you to turn in the vehicle early and lease another. Time is running out to pick: return or keep.
Other than the ease of writing off those lease payments as a business expense, if you qualify, the key reasons for leasing are lower monthly payments and the opportunity to move to a new car every two or three years. All three will factor into your return-or-keep decision process.
What does leasing a car mean?
The key to leasing is depreciation or the amount of lost value. It begins the moment you drive a new car, truck, or SUV off the dealer’s lot. On average, vehicles depreciate as much as 20 percent the first year, and by as much as 40 percent over three years. Chances are, you’re sitting on a 36-month lease. Your monthly lease payment was calculated to cover that lost three-year value plus interest on that money.
Leasing companies don’t know exactly how much a new car is going to depreciate over the length of a lease. So, they make a calculated guess, based mostly on past depreciation experience with that brand and model. Like Las Vegas oddsmakers, there are some third-party outfits, as well, that weigh in with educated estimates of a new car’s market value two or three years down the road. The remaining value of a leased car at the end of the lease is known as the “residual” in the residual value.
At the end of a lease, the best-case scenario comes when you have a well-maintained vehicle that hasn’t exceeded the total annual mileage cap. In which case, you may hand the keys to the leasing agent and walk away. It’s far from uncommon, however, that you have either exceeded the mileage, for which you may owe around 25 cents per extra mile, or there is more than normal wear and tear on the vehicle. The leasing company determines what is “normal” wear and tear.
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You will be on the hook for excess mileage and whatever the leasing agent estimates the cost will be to repair those dings, dents, and any damage to the upholstery. Hey, you didn’t even notice that spot on the back seat, did you?
Five reasons to buy your leased car
1. You can buy the car for less than it’s worth
The lease contract you signed many months ago specifies the residual for the vehicle. This is the guess the leasing agent made at the front end of the deal. If the leasing agent guessed wrong, the residual could be less than the current market price for that model vehicle. The good news: The residual is what you will pay (plus the usual fees) to buy your leased vehicle. You already ate the initial three-years depreciation with the lease. Why not take advantage of that?
As the used-car market is shaping up in 2021, it’s likely your leased vehicle is worth more than the price (residual) at which the leasing agent must sell it to you. According to Cox Automotive data, wholesale used car prices increased an average of 5.9% in March alone. That’s nearly a 6 percent jump in just one month. Thanks to the short supply of used cars, this trend is expected to continue throughout the year.
2. You like the car and took good care of it
So, the love affair with that new car with which you were smitten years ago isn’t over. Nor should it be. If you like and feel at home in your car, why dump it? You’ve taken good care of it, followed the factory maintenance schedule, and didn’t drive it like you stole it, right? So, keep it. You had perfectly good reasons for leasing it in the first place. If they still hold up, why replace it?
3. You are facing a big punitive assessment
Maybe you didn’t take as good care of your vehicle as you thought. Suddenly you are facing a big fee for excess wear and tear, or even worse. On top of that, you exceeded the mileage cap of 36,000 miles over three years. Missing it by just 1,000 miles will cost you $250 or more. You can avoid that big balloon fee at the end of the lease by simply buying the car.
4. You want to avoid the hassle of car shopping
Although the internet has somewhat streamlined the process, shopping for a new ride can be exhausting. Unless you love the thrill of the hunt, you may want to just take the course of least resistance and buy the leased car. This is particularly true if you like the car. End-of-lease deal making with a lender is generally quicker and easier than starting from scratch with a new car.
5. New and used car prices are higher
Car makers are struggling to keep up with new car demand. The current microchip shortage is a fresh wrinkle in the auto industry’s attempt to keep pace with demand. Because of the short supply of new cars, there aren’t as many used cars making it to dealer’s lots. Consequently, the supply of used cars is thin, as well. According to Cox Automotive data, there are roughly 2.3 million used cars available in the United States today. This is a 530,000 drop from a year ago. Supply is tightening. Bottom line: You will pay more right now for new or used cars.
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How to buy your leased car
When you’ve made the decision to buy your leased car, alert the leasing agent. Unless you used an independent leasing company, the agent is probably the dealer where you struck the deal. Whoever has been nagging you about leaving your lease early to lease another car, that’s likely your agent.
From there, take the same steps you would follow to buy any new or used car. It’s a smart idea to shop around for financing to at least know the rate for which you qualify before sitting down with the leasing agent.
See: The car brands with the most inventory
We recommend checking your specific car’s value so you go into the dealership armed with the information you need to make a great deal.
This story originally ran on Autotrader.com.