A computer chip shortage continues to impact automobile manufacturing. And with less supply and high demand, prices for new vehicles and used cars are at record levels. These factors create a unique — and possibly lucrative — situation for drivers with leases that will soon expire.
It was common for most consumers to return the car at the end of a lease in past years. Today, lessees who signed contracts before the pandemic should carefully evaluate other end-of-lease options.
Read on to learn about alternatives to consider, including the potential benefits of buying your car at the lease end as automakers wrestle with a shortage of computer chips and supply chain issues.
With a lease, you make a monthly payment for a contracted number of months. Instead of paying down a loan and building equity, you are paying for the car’s estimated lost value (depreciation) during the term (length) of the lease.
After factoring in depreciation, the car’s residual value remains. It is the estimated amount the vehicle is worth at the end of the lease. In other words, it’s the buyout price and what you’ll pay if you want to purchase the car when the lease terminates.
The residual value is calculated in your contract as a percentage of the car’s MSRP (manufacturer’s suggested retail price). Whether it’s a percentage or a specific dollar amount for the purchase option, it’s important to note that the financial institution holding the contract estimates the residual value at the beginning of the lease.
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Crunch some numbers if your lease is about to terminate. Use our car value calculator to see a range of what you might get for your vehicle. There’s a strong possibility that the car you leased in 2018 or 2019 has a lower residual value than the current market value for that model.
The reason is that used car values rose rapidly in 2021 because of high demand due to limited new car inventory on dealership lots. An analysis by KBB parent company Cox Automotive found that by the end of 2021, the average used car in America sold for $28,205. That’s 28% higher than it was just one year before. It’s 42% higher than in December 2019, the last month before the first confirmed case of COVID-19 in the United States.
So, consider the purchase option if you like the car you’ve been driving, and it hasn’t given you problems for the past two or three years. You might be able to buy it for significantly less money than a comparable model would cost if you found a car for sale.
The buyout option isn’t a good choice for you if the car’s residual value is more than the market value.
If you use the buyout option to purchase the leased vehicle, you may be able to sell it to another individual for a profit. It might be worth your effort if the money is significant. However, the necessary paperwork and the potential for you owing tax discourage some private sellers.
What will you do for your next set of wheels if you return the leased car or purchase it to resell? Keep in mind that vehicle inventory can be spotty. Finding your desired trim level, options, and color might take some time.
And remember that demand is so great right now that many new car buyers are paying MSRP or higher.
Manufacturers typically subsidize sales promotions and leasing specials to help move slower-selling models. In today’s environment, vehicles of all types are moving fast without incentives. You might find a good lease deal, but locating the exact model you want can be challenging.
Suppose you’re approaching the end of your lease and you would like to start a new lease on a different car, but you haven’t found the right vehicle. Most lessors will extend the lease on a month-to-month basis or for a fixed number of months. You will have to continue making the monthly payment and probably need to sign another contract for the extension.
