Drivers who leased may win now if buying
Automobile prices continue to go up and up. But there is one group of people who may still be able to get good deals — those who leased cars before the pandemic with the option to buy when their leases end.
“People are definitely going to have positive value in their lease,” said Ivan Drury, a senior manager of insights at automotive website Edmunds.
This has not always been the case, auto analysts say. But the pandemic-induced topsy-turvy used car market has turned the numbers around for consumers who signed leases two or three years ago.
A shortage of computer chips needed for manufacturing and strong demand are keeping supply scant and prices high for new and used models. The average transaction price for a new car topped $40,000 for the first time in 2021, and the average price for used cars reached almost $25,000, according to the National Automobile Dealers Association’s midyear report.
“It’s a unique time because of the increased demand and low inventory,” said Brian Moody, executive editor of online car marketplace Autotrader.
Shoppers are finding that getting the car they want, at a price they are willing to pay, has become difficult. But people with leases expiring soon may find they can buy the car they already have at a relative bargain.
Here is why. With a lease, drivers essentially rent the car for a fixed period — they do not automatically own it when the lease term is up, as they would when paying off a traditional car loan. But lease contracts often include the option to buy the car at a preset price when the lease ends — typically, after two or three years. To arrive at the buyout price, the dealer applies a formula that estimates how much the car will depreciate over the term of the lease. But because used car prices have been rising so quickly, most buyout values set before 2020 are probably lower than current market prices.
“The advantage now comes
because the terms were calculated before the pandemic, when transaction prices for used cars were lower,” said Benjamin Preston, an automotive writer for Consumer Reports.
Most new car purchases are financed with loans, but about a quarter are leased, according to Experian data from the second quarter. Leasing tends to be popular with drivers who want lower monthly payments or who prefer new cars with the latest features. The average difference between a loan payment and a lease payment for popular new cars was $109 in the second quarter, according to Experian. For instance, the average monthly loan payment for a Honda Civic was $418, compared with $309 for a lease. And for a Toyota Highlander, the average loan payment was $633, versus $493 for a lease.
For drivers with leases, the gap between the projected price and current market price may be substantial. Auto search website
iseecars recently compared current prices for 3-year-old cars and estimated buyout values of new models leased in 2018 and found that the average car may be worth 36 percent more than the value estimated at the beginning of the lease.
The gap may be even greater for some models. The current market value of a Volkswagen Tiguan, for instance, could be $9,800 higher than projected three years ago — a 69 percent increase. Even a subcompact, the Nissan Versa, has increased in value by more than $4,300, or more than 50 percent, according to iseecars. The analysis was based on a database of about 10 million listings of new and used cars.
So if you like your car and it is in good condition, it may make sense to purchase it when the lease ends.
“You should very carefully consider buying the car instead of returning it,” said Karl Brauer, an executive analyst at iseecars.
Consumers increasingly have been doing just that. Daniel Berce, CEO of GM Financial, the financial services arm of General Motors, told an investor conference in August that in the second quarter of this year, 89 percent of lease customers purchased their vehicles at the end of their leases, compared with about 20 percent a few years ago.
You could also buy the car and then resell it yourself, pocketing the profit. But you may owe sales tax, and there is another catch: If you need another car, you may not easily find one that you like at a price you consider reasonable.
An alternative may be to use the “equity” in your lease — the difference between the current market valuation and the buyout price — to reduce the cost of leasing a new car, said Drury of Edmunds. In effect, you sell your lease to a dealer, which credits the amount to your new vehicle lease.
Jeff Perlman, an independent public relations consultant in Los Angeles, said he prefers to drive new cars and was able to apply equity from his lease of a 2019 Genesis G70, a luxury sports sedan, to a lease of a more expensive, redesigned 2022 version of the car. He did not have to put any money down, he said, and pays just $38 more per month.
“I’m beyond happy,” he said. One possible catch with this approach, Drury said, is that some dealers and finance companies may not let you sell the lease to a competing brand, which may narrow your options for your new car.
Here are some questions and answers about buying a car off lease.
How can I tell if buying my leased car is a good idea?
Check your lease document. The buyout price — or the formula for calculating it — is typically included in the terms. (It may be called a “purchase option” price.) Then search online, using Kelly Blue Book, Truecar and Edmunds or sellers such as Carvana and Carmax, to see current asking prices for comparable used cars. If the buyout price is lower than the market price, it may make sense, iseecars’ Brauer said.
Can I finance the purchase of my car when the lease ends?
Paying with cash is the cheapest option because you will not pay interest charges. But if you finance the purchase, proceed as if you were starting a car hunt from scratch. Get preapproved for a loan at a bank or credit union before visiting the dealer so you have a comparison for the dealer’s financing offer, said Ryan Felton, a Consumer Reports writer who recently investigated variations in interest rates charged to borrowers with similar credit profiles. “Your best bet is to shop around,” he said. And keep an eye on the total cost, he said, not just the monthly payment.
What are the current interest rates on used car loans?
The average interest rate for a used car loan was 8.66 percent in the second quarter, according to Experian.