4 Things to Know About Equity and Your Leased Car

Read time: 8 minutes 

Leasing a car comes with its own set of financial considerations, one of which is equity.

In short, car lease equity is the difference between the vehicle's current market value and the remaining lease balance.

Understanding how equity works can help you make informed decisions about your leased vehicle, so we’ll go over, in detail, what exactly equity is and how it’s calculated.

We’ll also show you why you should care about the potential lease equity in your car, along with the benefits to unlocking and accessing that equity.

Ready? Let’s review four essential things to know about equity and car leasing.

Table of Contents: 

1. Equity Basics
2. Car Equity Specifics
3. Why Equity Matters
4. How to Unlock and Access Car Equity

1. Equity Basics

Equity is the portion of an asset that you own and can benefit from in some way.

Consider an asset like a home. Whoever owns it likely has — or at one point had — debt that was used to purchase and own it. (For homeowners, that debt is a mortgage.)

Generally, the goal is to pay off a debt and own the asset entirely. But that might take a long time, or the asset may even be sold before then, so we need a way to describe ownership of the asset along the way.

A better definition of equity, then, is what you’d be left with if an asset was liquidated (or sold) and any and all debts were paid off.

Example of home equity

Let’s say you’ve bought a house, with a mortgage, for $500,000. If you eventually pay off $200,000 of the mortgage and then sell the house for $500,000, you have $200,000 of equity in the home. How? You got $500,000 from the sale, had to use $300,000 of that to pay off the rest of your mortgage balance, and are left with $200,000.

The thing is, assets (especially homes) rarely sell for exactly what you initially paid. We’ll circle back to this — and why it matters — in a sec.

Example of car lease equity

Car lease equity is the positive difference between the market value of your leased vehicle and the remaining balance on your lease.

You have equity when the vehicle's value is higher than what you owe on the lease. For example, if your leased car is worth $20,000 and you owe $15,000 on the lease, you've got $5,000 in equity. 

How much is my leased car worth?

To determine your car lease equity, you'll need to know the current market value of your vehicle and the remaining balance on your lease.

You can estimate the market value by checking online car valuation tools and the remaining lease balance can usually be found on your lease agreement or by contacting your leasing company.

2. Car Equity Specifics

You may be wondering, isn’t equity just for things you own or finance — not for something you’ve leased?

This is a bit of a trick question, because leasing a car is a form of financing (that’s why you have an APR on a lease). According to Lease End CEO Brandon Williams, one of the biggest questions that consumers seem to have about leasing is “whether they own the vehicle or not.”

Let’s say you’re looking for a 3-year lease. When you lease, the manufacturer (Toyota, Honda, etc.) is lending you a car for the cost of driving it for 3 years. (This whole transaction is facilitated through a dealership, who often marks up the transaction.)

The cost of driving the car is the depreciation of the car over those 3 years: the amount of value that the car loses during those three years of use, wear-and-tear, and mileage.

So, similar to equity in a home you’ve financed, you can build equity in a leased car.

Let’s say the lender decided that, over the course of your lease, you’d need to pay $25,000 for 3 years of the car’s life (in addition to fees and interest that the lender adds). If you’ve paid $13,000 on your lease so far, you have $12,000 of equity in that car.

3. Why Equity Matters

Let’s revisit our example of home equity.

Remember — you’ve got a home that you "paid for" with a mortgage for $500,000 — and you’ve paid $300,000 of that mortgage off, so you have $200,000 of equity in the home. 

That amount you’ve paid off will stay consistent (until you pay more off, obviously). The home’s value can change, though — and this can be to your benefit or your detriment, depending on the market. 

Implications of home equity

Think of someone who bought a house for $500,000 but could only sell it for $400,000.

Even if they pay off the full $500,000 mortgage by the time they sell it for that price, it’s like they’re losing money. They’ve invested $500,000 into the home, but only got $400,000 back for it.

This is, of course, is why people don’t like to sell their houses for less than they paid.

But it can work the other way around as well.

If you’ve bought a house for $500,000, paid it all off, and end up selling it for $700,000, you’ve made money off that $500,000 investment. That’s the position everyone wants to be in. 

Implications of car equity

Let’s apply this concept to leasing now. 

Let’s say you’ve leased a car with a $35,000 MSRP (Manufacturer’s Suggested Retail Price). That’s more or less how much you’d pay to buy the car and own it, plus fees.

However, if you’re entering into a 3-year lease term, you don’t need to pay the full price of the car — you just need to pay for the cost of 3 years of the car’s life (in other words, 3 years of depreciation) plus leasing expenses.

How does this break down into your lease payments?

The lender takes the MSRP and then estimates how much the car would be worth at the end of your lease period. Let’s say that in this case the MSRP is $35,000, and the lender estimates that the car’s worth after the 3-year lease — or, the residual value — is $21,000. That would mean that you only need to pay $14,000 over the course of the lease to cover that depreciation, right? 

Not quite. In addition to markups that cover maintenance, incidentals, and the leasing process, your lender factors interest into your lease payments (because you’re financing the lease).

These additional costs are a big reason why many people choose not to lease — because you’re paying for the depreciation of the car and then some. 

So let’s say that, with those additional costs, you pay closer to $20,000 over 3 years to drive that car. At the end of that lease term, you’ve paid everything in full — basically, you’ve invested $20,000 into the car.

What’s important now is the car’s current market value. Generally, lenders make their depreciation estimates pretty accurately.

But if they guess wrong, you could actually make money off your lease. 

Buying out or trading in a leased car with equity

Generally, you have two options for ending a lease: turn it back in to the dealership in favor of another, or buy it out (and then keep or sell it). If your lender was right on the money, and your car’s market value is $21,000 when your lease is over, you might be more inclined to just turn the car back in.

Trading in a leased car with equity can be a smart financial move. If your leased vehicle has equity, you can use it as a down payment or to reduce the capitalized cost of your next vehicle. This can lower your monthly payments or help you qualify for a more expensive car.

However, not all leasing companies allow you to trade in a leased car with equity, so it's essential to check your lease agreement or contact your leasing company for specific rules. 

But let’s say your lease-end rolls around, and after some browsing online, you find out that the car you’ve been leasing — with similar mileage and condition — is currently going for around $28,000. If you turn the car back in to the dealership, they could sell that car at that price — or more — and get money back on an investment that could have been yours.

The thing is, you can access that equity, too. If you buy out your leased car for $21,000, the residual value of the car, you could sell it for $28,000.

Let’s review the numbers one more time.

The car you leased was valued at $35,000 brand-new, and you’ve paid $20,000 over 3 years to drive it. That $20,000 is equity you’ve put into the car.

When you reach the end of your lease, it may feel tempting to just walk away — after all, buying out a leased car is just spending more money, right? But if you don’t buy out a leased car, you’ve just spent $20,000 on an asset you won't ever own.

Assuming you’ll still need a car at the end of your lease, you have the option to

1. Buy a brand new car,
2. Try and find a good deal on a used car, or
3. Keep the car you’ve already been driving at an (often) below-market price.

Buying out your leased vehicle means taking advantage of the equity you’ve already invested into your vehicle — without starting over from scratch. 

So, how exactly can you do that?

4. How to Unlock and Access Car Equity

Lease buyouts are key to fully accessing lease equity in a car — there’s really no other way to get it. Although you can build equity in a car while you’re leasing it, you will need to own it to actually take advantage of that equity. 

A lease buyout is when you buy the car from the lender for a set price stated in your lease contract. 

This pre-determined price is that lender’s estimate (the residual value) for how much the car would be worth at the end of the lease. If the buyout amount is above your budget, you can get a loan for that buyout amount through Lease End. 

Read More: How End-of-Lease Buyouts Work

Once you’ve bought out the vehicle, it’s yours, so you can sell it and make a little extra cash, or keep it for yourself.

If you keep it, you won’t get your positive equity as cash-in-hand, but you will be ahead of the curve by only financing, say, $21,000 for a $28,000-value vehicle.

You’ll keep making monthly payments just like you have been — except this time, you own the car (and your payments may even be lower than they were during the lease!).  

Next Steps to Cashing in on Equity

Whether you're looking to trade in your leased car, buy it outright, or simply understand its value, knowing how equity works is key. By staying informed and exploring your options, you can make the most of your leased vehicle and potentially save money in the process. 

According to Lease End COO Zander Cook, the biggest myth about leasing is that you have to go back to the dealership to end your lease when in reality, you can buy out your lease from the comfort of your home! 

We want drivers to know that they have options — options that can save both time and money.

To start the process online, enter your license plate or VIN in the box below. 

You can also try our Monthly Payment Calculator to get a rough estimate of your monthly payment for a lease buyout auto loan.