Wednesday, November 9, 2011

Should I Lease? Part 2 of 4 ~ What happens at the end of my car lease? - A discussion of your lease-end options

     As I mentioned last time, todays vehicle  leases are “closed end” leases.  What that means is that the residual, or lease-end value we discussed last time, is guaranteed by the lease company.  This guarantee opens up options for you as your lease expires.  Here’s where the fun begins!   With options at the end of a lease, this financing option becomes a viable option for a majority of car buyers to at least consider.

     The option most people are familiar with is the option to turn the vehicle in at the end of the lease.  That means you make your payments every month (or one payment up front, in a “single payment” lease – more on that later), paying your way down to the predetermined lease end value.  At that time, if the car is worth that value, or less, you get to hand the keys back in, pay a small disposition fee (often waived, if going with the same car company and lease company again) and pick out your next car.  While there is no equity with this option, and you are walking away from the payments you made, you are also not in a position where the car is worth less than you owe, and therefore have no money from your old car to roll into your new financing.  As long as you haven’t driven more miles than paid for in your contract, your maintenance is up to date, and you have no abnormal damage or wear & tear to your vehicle, you are free and clear of your obligation to the old car.

     Before turning in your old lease, however, it may be worth your while to check the market conditions.  The residual value is printed on your lease contract (hopefully you kept it), or would be available from your dealership or lease company.  It would be a good idea to see what dealerships would pay for your car.  If they will pay more than the amount on your contract, the extra money is yours!  Sell it to them.  They’ll send the residual amount to the lease company, and can write you a check for the remaining balance, or apply it as down payment toward your next vehicle.  Here’s the thing, though.  When you are getting this figured out, find out how much they will buy your car for, even if you don’t get anything from them.  Some dealerships will try to use discount from the car you buy (that they can give you anyway) to make the value seem higher than they are really paying.  Don’t fall into that trap.  Get the amount they will buy your old leased car for, and then look into a car you may be interested in purchasing.

     As long as we are talking about selling your car, some people choose to sell their car to a private party.  This is an option open to you as well.  Be aware that, depending on state tax laws, you most likely have not been taxed yet on the residual amount, so if you do it wrong, you will have to buy it out, pay the taxes and fees, and then sell it to the customer.  But there is an option.  Many dealerships, if you are buying your next car from them (and especially if this is the dealership you leased your old car from in the first place) will allow you to bring in your customer to buy your old car from the dealership, rather than straight from you.  In this case, as a reseller, the dealership buys out the lease, pays no sales tax on that amount, sells it to your customer at your agreed-upon price, and collects the taxes and fees only from your customer.  The profits above your residual are then given to you (again, typically as down payment on your next car, but can be as a check).  Many dealerships will not take a cut of your profits in this transaction, since they are selling you a new car in the process, and sold you the old one as well.

     But what if you like your car, and would like to drive it a few more years?  What if you like it more than the new cars you are looking at, and don’t want to give it up or sell it yet?  Again, this is your option.  Most lease companies also offer car loans, and would be happy to send out loan documents for the residual amount (plus taxes and fees for your state), setting up the loan balance into monthly payments similar to your old lease payment.  Then you just keep making payments until you pay it off.  In fact, many people lease their car when it is new, knowing full well they will choose this option when the time comes.  With the low rates and low payments offered on a lease, this can be attractive, and it offers an “option point” in the middle of the ownership experience, in case needs or wants change, and they decide a different vehicle is desirable after just a few years.

     Whichever option you choose, the fact that you can choose is the great part.  If you simply take out a long term loan to make the payments affordable, you have no options until the loan balance catches up with the depreciation, or until you decide it’s ok to roll the negative equity balance into your new finance contract.  If you decide to lease your new vehicle, at the end of the lease, which option fits you is completely up to you.  Want to keep the car, and the residual is a good value for a car like yours?  Turn it into a loan and keep driving it.  Needs or wants change and you decide a different car is in order?  No problem!  Do you have a buyer for your car, or can the dealership pay you a profit at lease end?  Go ahead and take advantage of it.  It’s all up to you!

     But should you lease in the first place?  We’ll take up that conversation next time.  Thanks for reading!  I hope this helps.  Questions?  Just ask!  And happy shopping.

Click here for Part 3 - Is Leasing Right For Me?

Mike Bidwell
Mankato Motor Co.

No comments:

Post a Comment