What You Need to Know About Car Lease Equity
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Leasing a car can be a great way to get behind the wheel of a car you want without the long-term commitment. With a lease, you never technically own the car. Instead, the lessor (in most cases the dealership or a lender) has ownership of the vehicle, while you agree to rent it out for a specified period.
However, at the end of every lease term, you are given the option to buy the car from the lessor. This might sound like a bold move, but there are situations where it can actually be profitable to buy out your lease. Before you do so, however, it’s always important to understand the equity you have in the car.
In this article, we’ll explain what lease equity is and why you might want to take advantage of this with your leased car.
LEARN YOUR LEASE OPTIONS
Thinking of selling your leased car? There are actually two ways to do it! Learn more about your choices in our post Want to Sell Your Lease? Here Are Your Options.
What is equity?
To understand equity, you have to know a little bit about lease agreements. At the beginning of a lease, you agree to lease the car on a given monthly payment schedule for a certain duration, typically 12, 24, or 36 months.
The lease agreement will specify a residual value, or how much the lessor expects the car to be worth at the end of the lease when you are due to return the car to them. This residual value is calculated from projections about the depreciation of the vehicle due to age and wear and is based on the wholesale market at the time the lease begins. However, projections are inherently inaccurate, so the residual value might end up being more or less than the actual value of the car by the end of the lease term.
If the actual value is lower than the residual value, then you have negative equity and the car is considered “upside down”. This means that the residual value of the car is worth more than the actual value of the car, and you’d be losing money if you bought the car to sell or trade-in.
But if the car has a higher market value than the residual value, the car has positive equity. Your lease may have positive equity for several reasons:
- You maintained low mileage on the car and kept it in tip-top shape
- The demand for the car increased
- The dealership overestimated the depreciation
If this is the case, buying the car might be a good option for you.
HOW MUCH SHOULD YOU PAY FOR A USED CAR?
Don’t let yourself overpay for a used car. See how much you should pay with CoPilot’s car cost articles.
Buyout price vs. residual value
You also might have the option to buy the car out before the lease is over. In this case, you will have to pay the residual value and any fees associated with a buyout, as well as the remainder of the lease value. For instance, if you have 5 months remaining on your $400/month lease, you will have to pay the residual value plus the remaining $2,000 you owe. This total price is known as the buyout price. If you’re calculating your equity before the end of your lease, be sure to consider the buyout price— not just the residual value.
You can sell the lease before the term is over if it is allowed in your state and the terms of your lease. In this case, you can sell the car to a private buyer or a dealership. Either way, the new buyer will pay the lessor their buyout price and pay you the equity from the price they agreed to buy the car at. This is a great option if you have equity in the car and want to get out of our lease.
What can you do with your lease equity?
If your car does have equity, the obvious advantage is the ability to sell it for a profit. However, there can be upsides beyond this.
If buying in cash is an option for you, buying out your lease can mean full ownership of your car and no more monthly payments. But if you don’t have cash on hand, buying out the car with financing can give you more flexible monthly payments. This can end up being less expensive than returning the lease to the dealership and starting a new lease on a new car that you still won’t own.
If you plan to start a new lease with the same lessor at the end of your current lease (or buy a car from them) then the equity in your car can be used as part of the down payment for the next car.
NOT JUST FOR CAR SHOPPING
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