New Twists on Car Leasing
A fascinating thing has happened to the value of vehicles that were leased three years ago. Before the pandemic and before there was a shortage of semiconductor computer chips that are used in today's cars, lease car companies estimated the residual value of vehicles based on current prices - back then. However, the lack of those computer chips meant fewer cars made their way to dealerships and lease facilities. It was suddenly harder to fill car lots with new cars, trucks, and SUVs which drove prices up on new vehicles because they were harder to get. Simple supply and demand. By the same token, fewer new cars on lots and higher prices led potential buyers to purchase used cars in droves. Pretty soon, a lack of used cars on lots drove the prices up on used cars as well.
The Best Car Deal might be to Buy Your Lease
You might call it the perfect car buying storm. But here's the plot twist. The residual value of lease cars was locked in contractually speaking, even though the value of those cars kept rising over time. Now, three years later, people are turning in their lease vehicles to discover that they are worth a lot more than the original residual value that was locked in their contract. Extremely low levels of car inventories made the current value of three-year-old lease cars skyrocket.
Car Values at an All Time High
Back in June of 2021, the prices on used vehicles had risen by an amazing 45 percent. It was the largest year-over-year change ever in the Consumer Price Index according to the U.S. Bureau of Labor Statistics. In 2022, used car prices continued to rise by a healthy 7.1 percent over the previous year. Many consumers have no idea that their three-year-old lease car is now worth significantly more than when they signed their lease contract.
That's why it may be a good idea to buy your lease car at the end of the lease rather than just turning it in for another lease car. It is definitely worth reviewing your options because a lease vehicle that is currently coming to term may be the hands-down best car deal available. Plus, it is hard to find a good deal on any used vehicle on the market these days. A typical five-year-old used car is worth 14 percent more today than it was a year ago. The buyback price of your three-year-old lease car is generally lower than the price of buying a similar used car off the lot of your local dealership, if you can even find one.
Residual Value
It makes sense when you consider that the residual value that was written into the original lease was based on estimated forecasts that were made before the worldwide economic collapse caused by the pandemic and the resulting shortage of computer components and supply chain disruptions that caused a reduction in the number of new vehicles produced and available.
Check your lease contract to find out what the residual value is of your lease car and realize that the vehicle's actual current value is likely anywhere from $6,000 to $10,000 more than noted as its value at the end of the lease. You could literally buy the car back from the leasing company and then turn around and sell it for a lot more the next day. While checking out the lease contract, look for the purchase-option price and any related fees. Not all lease agreements allow you to buy back the vehicle, but most of them do. Interestingly, Ford Motor Company recently removed its buyout option on leased all-electric vehicles such as its F-150 Lightning truck and Mustang Mach-E crossover.
In order to buy back your lease car you'll need to contact the lease company before the lease ends. Be aware that you will have to pay title and registration fees as well as sales tax on the car in most states. Alaska, Delaware, Montana and New Hampshire do not charge sales tax on new or used vehicles. Looking up an estimate of the market price your lease car would fetch on the open market is easy. Simply use our Trade-in Tool here on Lithia.com. Enter the year, make, model and trim level of your car as well as the mileage and condition. We work with industry leader Kelley Blue Book to give you an instant value on the car. You might be surprised at what your lease car is actually worth.
Other savings connected to buying back your lease car include the fact that certain fees are forgiven if you are buying the car. Let's say you have driven more miles over the term of your lease than authorized in your contract. Normally, when you turn in a lease car, you are charged a penalty of around 25 cents for every mile over the limit that you've driven. That can really add up. But when you buy back a lease car, you don't have to pay the mileage penalty. Similarly, when you return a lease car, you pay a disposition fee to clean up the car and repair any damage so that it can be ready for resale. If you buy your lease car there is no disposition fee.
Shop for Financing
Even if you don't want to keep your three-year-old lease car, you may be able to turn around and sell it for a quick profit. But most people still need a reliable vehicle, and by the end of three years, you know your lease car inside and out. In the current market conditions where finding the right used car is downright difficult, buying and keeping your lease car might be the way to go.
To finance your buyback car, shop around for the lowest rate. You can try the finance company that leased you the vehicle or your bank. Many credit unions are trying to build up their car loan divisions and are offering very good rates. If you have a stable job and good credit, with a credit score of 700 or better, you may be able to get a low interest loan of around 5 percent. According to Bankrate, the average 48-month used car loan interest rate is 5.32 percent. Some lenders are going as low as 2.5 percent on interest rates when you have an excellent credit score and agree to make automatic payments from your checking account.
The Bottom Line
Though the world is rebounding from the pandemic years, supply of new and used cars is still very tight and is likely to be so for several years. Let Lithia Help! With over 75 years of experience in finding personal transportation solutions for our valued customers, Lithia Motors is here for you. Whether you are looking to buy, sell, trade a car or purchase your lease car, we're here for you. Find a Lithia Motors dealer near you right here.
