Buying Your Leased Car Could Save You Money Now
For many people, buying out a vehicle lease at the end of its term usually doesn't make economic sense. The pandemic has changed that equation, at least for now.
At the end of their lease, many people turn in that old vehicle and lease another one. They like driving something new. And when they see how much they'd have to pay to buy out the lease, they see it's just not worth it.
But inventory problems are driving car and truck prices up 16% over the past year and 50% more than before the pandemic, according to Fortune. That means the market value of vehicles coming off lease right now is often well above the cost set by the finance company two or three years ago to buy out the lease at the end of its term (the residual amount). You may find that buying your vehicle as it comes off lease will result in a windfall.
Eric Steinmetzer of Seattle was "excited and delighted" to find out how much things have changed when the lease on his Cadillac Escalade ended. The residual value, which had been set three years earlier, was so much lower than the current value, he decided to buy the car.
"So, instead of looking for another lease, as I'd normally do, I just went ahead and financed my car because of the great value it had," Steinmetzer said. "I was able to stay in a great car that I loved, and I lowered my payments by $500 a month. It was free money."
Robb McCalmon, general manager of Kendall Chevrolet and Subaru in Marysville has been in the business for more than 20 years, and he's never seen anything like this before.
"With a lease, the manufacturer takes all the risk," McCalmon told Consumers' Checkbook. "If the car is worth $20,000 at the end of the lease and your buyout is $25,000, you can just turn it back, and the manufacturer deals with the loss. Well, it's the opposite now. People are coming in at the end of the lease, and they're in a good position."
It's not uncommon for lease customers to have $4,000 to $6,000 in equity, McCalmon said. With some luxury vehicles that equity could be higher.
If the residual value is more than the market value, but the customer still wants to turn in their leased vehicle, dealers will apply that equity towards the purchase or lease of another vehicle.
"Some people are coming in and they've got $5,000 equity, and they buy or lease a new vehicle and leave with a lower monthly payment," McCalmon noted. "And in a market where payments are normally going up because of inflation, they're coming out pretty good."
Desperate for used vehicles, some dealers are letting customers turn in their cars with a few months left on their lease, making the last few payments for them and waiving the early-termination penalty fee.
When I bought a new car a few years ago, and traded-in my old one, I got the best offer by taking the car to a dealer. With the current shortage of used cars, some dealers are paying top-dollar for clean, well-maintained, low-mileage used vehicles.
Advice Adjusted for Current Market
Unless you have specific business or tax reasons for leasing, or you buy a new car every two or three years, consumer advocates usually advise buying instead of leasing a new car to save money over the long run.
But for those who already have a lease, auto experts are recommending you consider buying that vehicle when the lease is up because it could be a money-saving move.
"It usually doesn't work out to buy your leased vehicle, because the leasing company is always going to create the terms of the contract in their favor, but these are special circumstances," said Ben Preston, auto reporter for Consumer Reports. "The price you pay on a lease buyback right now because the price was calculated pre-pandemic, might be less than the market value of the car. So, if you were to buy that same car on the used car market, you'd probably pay significantly more for it."
Jack Gillis, author of "The Car Book," and member of Consumers' Checkbook's board of directors, points out that buying your car at the end of the lease reduces the risk of buying another used car with mechanical problems or safety issues.
"You know exactly what experience you had with that car," Gillis said. "If you're buying another used car, you're really buying a pig in a poke, because you really don't know what experience (the previous) owner had. So, if that car has treated you well, and you like it, buy it and you could save yourself thousands of dollars."
Leasing Usually Costs More in the Long Run
It's easy to understand why leasing is so appealing. The monthly payments are smaller than buying, the down payment is typically less, and dealers offer a variety of incentives to lease.
This can help your cashflow or make it possible to drive a vehicle you couldn't afford otherwise. Other benefits: The vehicle is typically covered by the manufacturer's warranty for the duration of the lease, you save money on the sales tax, and you don't have to worry about selling the vehicle when it gets old.
But do the math, Gillis said, and you'll see that leasing usually costs more than paying off a new car loan. And that's because you are paying for the rapid and significant depreciation that takes place when a new car drives off the lot.
"I always recommend buying the car versus leasing it — and especially today, because lease prices have gone up, and the residual values are now going up to reflect today's superheated used car market," Gillis said. "So, at the end of that lease, if you wanted to buy that vehicle, it's going to be very expensive."
There can also be "sticker shock" at the end of the lease if you've gone over your mileage limit, or there's more than normal wear and tear. "That's when it's going to cost you," Gillis said.
Consumer Reports compared buying vs. leasing and concluded that as attractive as a lease may appear, there are a number of disadvantages. It "usually costs you more than an equivalent loan," and if you lease car after car (as many people do), your monthly payment goes on forever. When you buy a car, the longer you own it after the loan is paid off, the more value you get out of it.
CR's advice: "Over the long run, the cheapest way to drive is to buy a car and keep it until it's uneconomical to repair."
If you're in the market for a new car, but don't need one right away, you might get a better price if you can wait until next year. It may take that long for manufacturers to deal with the current production problems.
About Consumers' Checkbook and CarBargains
Puget Sound Consumers' Checkbook and Checkbook.org are a nonprofit organization with a mission to educate and help consumers. Checkbook also evaluates local service providers — home improvement contractors, doctors, dentists, veterinarians, stores and more. It is supported by consumers and takes no money from the companies it evaluates. BECU members can try Consumers' Checkbook for 30 days for free and can get 50% off their annual subscription.
For more than 25 years, Consumers' Checkbook has offered its CarBargains service to consumers who want experts to collect pricing for them. CarBargains has helped more than 100,000 car buyers and guarantees it will obtain the best possible price.