1. How is leasing different from renting?
Leasing a car is not the same as renting a car.
If you’re renting something, you’re paying to use it for a certain amount of time, and you have to hand it back over when you’re done. Think of something like renting a paddle boat to take out on a pond – you’re paying to use the boat for a couple hours. You don’t have the option to buy that boat at the end of the rental period, and your rental payment doesn’t go towards building any equity in the boat. Basically, you’re borrowing it.
If you’re leasing a car, you’re not just borrowing it. Your monthly payments aren’t just compensation for your ability to use the car temporarily – they go towards offsetting the depreciation of the car’s value. This means that, depending on the car’s current value, you may have equity in the car. Additionally, you’re not obligated to turn it back in and walk away at the end of the lease; most leases give you the option to buy out or sell your leased car.
2. What is a lease buyout?
One of the most important elements of a lease-end transaction is the buyout (or payoff) amount. Whether you intend to keep or sell your car at the end of your lease, it’s important to understand what its buyout amount is, and how this relates to the current used-car market.
Simply put, the buyout amount is the amount of money needed to get your car out of ‘lease status’ and into ‘ownership status’ (whether that new owner is you or the person you sell your car to). If you’re leasing a car, the manufacturer technically still holds the title to the car, meaning they’re the legal owner. The buyout amount is what you, or someone else, would have to pay to get the title from the manufacturer and actually own the vehicle.
Another important player in this is the lessor (also known as the lender or lienholder). They’re the financial institution (like Wells Fargo or Toyota Financial) who originally lent the money for the car to your dealership. Lessors use their own methods to determine the final buyout price for your leased vehicle, so we can’t tell you exactly how that amount is calculated. However, we can discuss what goes into these calculations and, more importantly, what that means for you and your leased car.
To understand lease buyout amounts, you’ll first need to understand residual value.
Residual value, which is established in your lease contract, is basically the lessor’s forecast for what your car will be worth at the end of your lease. In other words, it’s a prediction of what dollar amount you (or the dealership) could sell the car for after the car has depreciated in value throughout your lease.
If their prediction is spot-on, you’ll have more or less gotten your money’s worth out of the car no matter which end-of-lease route you take. If their prediction is off – which is the case for most car leases ending now, while used-car prices are soaring – either you or the dealer could be out of some equity, depending on how the scales tip. That’s where the buyout amount comes into play.
So, that contractually-set residual value is the basis of the buyout amount, but they’re not exactly equal. Your actual buyout amount will be a combination of:
- The residual value.
- Any remaining payment obligations.
- Any fees charged by your lessor.
- Any state sales tax (but not every lessor includes this).
If you buy out your leased vehicle through your dealership, your buyout amount will also include any fees the dealership decides to add on (like a restocking fee, mileage-overage fees if you went over your limit, etc.). We recommend not buying out your leased vehicle through a dealership, since they’re known to tack on unnecessary fees for profit – like a ‘Certified Pre-Owned (CPO) certification fee’ up to $2,500 or a made-up $4,000 ‘Tri-State lemon law fee’ a New York Nissan dealership was caught charging customers who bought out their leases. Instead, an independent company (hey, like us!) can help you buy out your lease and refinance your car payments without the hidden fees. If you want to learn more about how buyouts work, you can read about our process here.
Because your buyout amount is based on a contractually-determined residual amount, it is usually non-negotiable. If you want to confirm your buyout amount, you can contact your lessor for the actual number (but remember, this won’t include any external fees).
3. So....is it smart to buy out a lease?
Normally, we’d say ‘it depends.’ But in the current used-car market, we’re going to say yes, definitely.
Remember how we said the lessor (or lienholder) gave your dealership a loan for your car when they originally purchased it? Your monthly lease payment helps cover that loan by paying off the car’s depreciation.
What does that mean? Well, your leased car is going to be worth a lot less at the end of the lease than it was when it was brand new. Let’s say your leased car’s market value was $40,000 when new, and now, at the end of your lease, it’s worth $20,000.
If you turn your car back in to the dealership at the end of your lease, they’re not going to be able to sell it for $40,000. Instead, they’ll have to try and sell it for $20,000. Lessors have to take this depreciation into account when calculating your car’s residual value, and if their calculations are off, you – or your dealership – could make a lot of money off your leased car.
Like we said earlier, because a lease is not the same as a rental, you have the chance to build equity in your car – in fact, the monthly payments you’ve been making have been doing exactly that.
Equity refers to the portion of an asset that you own. For example, home equity is the portion of the home’s value that you own outright (basically, the part of the mortgage you’ve paid off).
You also have potential equity in your leased car, which can be unlocked by buying out or selling the vehicle. To put it simply, the equity you hold in your leased car is equal to the car’s market value minus the residual value. If the car’s current market value is higher than the residual value, you have positive equity in the car.
Why Dealers Want Your Car – and Your Potential Equity – Back
So, back to the dealership.
Dealerships and manufacturers have a lot of financial incentive to get your leased car back at the end of the lease term. Why? If you just turn the car back in at the end of your lease, the dealership gets to charge you for things like mileage-overage fees and restocking fees, plus your vehicle is back in their inventory. If used car values are high enough, they can sell your car and make money off it.
That’s what’s happening right now. Most lease residual values are way lower than the actual market value of a given car, meaning dealerships that get leased cars back stand to profit off fees and that excess money they may get out of selling the car. The good thing is, you can make this kind of profit too. You can (and should, in our opinion) take advantage of the equity you have in your leased car. You have a right to.
4. What are my rights as a leaseholder?
First and foremost, make sure you reference your lease agreement before making any big moves. Not only can this help prevent you from running into roadblocks, but it'll be a good refresher on what you can do.
As a lease holder, you have a right to buy out your lease. You’re also entitled to any equity you’ve built in your car. Now that used-car prices are so high, many manufacturers and dealerships are trying different tactics to get leased cars back in stock and prevent you from capitalizing on the vehicle’s worth and your potential equity in it. Familiarizing yourself with your lease and what it contractually allows you to do is one of the best defenses against misinformation from manufacturers and dealerships intent on getting your car back in their hands.
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