Ridiculously low levels of car inventories are creating interesting dilemmas for millions of drivers with expiring car leases.
Bite the bullet and pay $300 or more a month to lease a new car or SUV, If you could find what you want? Or decide that maybe you’re looking at one incredible deal on a used car parked in your driveway?
All sorts of quirks have hit the car and truck market ever since the start of the COVID-19 pandemic more than two years ago, including some shocking spikes in used car prices.
The Consumer Price Index data released Wednesday indicated that used car and truck prices rose just 7.1% over the last 12 months through June. The year-over-year increase was 16.1% for May.
A year ago, things looked far worse when prices of used cars and trucks spiked by 45.2% in the 12 months through June 2021, the largest 12-month change ever reported for that index, according to the US Bureau of Labor Statistics.
The inflationary pull that drove up used car prices can work in the favor of drivers with car or truck leases that expire soon, perhaps without some consumers even realizing it.
Many consumers should not opt for business as usual and just return the car to the dealer when the lease ends without reviewing their options.
“We all believe the best deal in the market right now is a leased vehicle coming to term,” said Mark Schirmer, director of corporate communications for Cox Automotive. Schirmer noted that he bought his own car when it came off lease in May.
“The luckiest people right now are the ones who have a car coming off lease.”
The reason? If you’re the current driver, you might be able to buy your leased car or truck at a bargain price.
Luck might be debatable. If your lease is expiring, it has gotten far tougher than a few years ago to just turn around and find an incredible lease deal without a good-sized down payment.
And finding a bargain — or even an affordable used car or truck — isn’t simple, either. On average, 5-year-old cars sold for roughly $27.415 in June — up 14.1% from an average of $24,036 a year ago, according to research firm Edmunds.com.
The odd truth is that the buyback price for a car leased three years ago is often far lower than the price you’d pay for a similar used car somewhere — if you could find it, according to Ivan Drury, senior manager of insights at the auto market research firm Edmunds.com.
What’s known as the residual value is written into the original lease and basically an estimate or forecast of what the car or truck might be worth at the end of the lease.
The estimates, thanks to the economic upheaval created by the pandemic, proved to be dead wrong in most cases.
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The residual value could be $5,000 or $6,000 — or even $10,000 or more on a big truck or luxury vehicle — lower than what it would cost to buy a similar vehicle on the lot.
Once the dealer gets that car or truck after it is turned in when the lease expires, the price skyrockets.
Three years ago, of course, no one was predicting the supply chain disruptions — and skyrocketing demand — that we’ve seen the last few years.
A lease taken out in 2019 was written long before semiconductor shortages triggered production problems for new cars — and drove up the value of used cars to levels not seen in decades.
After doing some research, Drury said, many drivers will discover they’re actually better off buying their leased vehicle at the end of the lease because of the shortage of new cars and the extraordinarily high values for used cars now.
No, this idea will not work for everyone. If you absolutely hate driving that huge pickup you leased a few years ago now that gas prices have soared, you might want to move on to an electric vehicle or an SUV or car that has better gas mileage.
How do you know if a lease buyout might work for you? The first step is to look in your lease agreement for information about the purchase-option price and any purchase-option fee.
It’s written on the original paperwork or you can contact the finance company. Not all leasing agreements allow you to buy the vehicle after your lease term ends but many do. (For example, Ford removed the buyout option for customers who lease electric vehicles, such as the Mustang Mach-E and F-150 Lightning, beginning June 15 and after, according to Margaret Mellott, a spokesperson for Ford Credit Communications.)
You need to notify your leasing company before the lease ends.
You should expect to pay sales tax in most states if you buy out a vehicle at the end of the lease term. And there are titles and registration fees.
In most cases, Drury said, your vehicle’s buyout price is going to be much lower than the market value on a used car lot. Some exceptions, of course, apply, such as if you have way too many miles on the car or it’s in very bad condition.
Then, find out the market value of your vehicle. Get some initial offers and appraisals to gauge what kind of price you’d get for your specific car, based on its condition. You can’t get a great price if you’re car has been in a big accident and has a branded title.
Some consumers warn that you might not get the top dollar spotted with an “instant offer” online through Kelley Blue Book or others, either, because the small print notes that the dealer could offer less than that offer “pending inspection.”
Schirmer said he and his wife knew a year ago that they wanted to buy the Subaru Outback that they leased in spring 2019. She likes the car. And he knew that used car prices had skyrocketed, making the buyout price of less than $21,000 attractive.
On top of that, the Outback ended up being about 7,000 or so over the allowed mileage in the lease.
“If you buy it, there’s no penalty,” Schirmer said. Given the upside-down market, though, he added that a dealer might have been willing to negotiate or even waive that mileage penalty just to get the car.
With that strategy in mind, the couple saved extra cash and dipped into some savings to write a check to buy the vehicle, instead of having to finance the deal in May.
“I could have turned around and sold it for $28,000 the same day,” Schirmer said. “All the prices are through the roof.”
Another plus: If you’re returning a vehicle to the dealership, you’d pay a disposition fee at the end of the lease — a flat fee to cover the costs of cleanup and repair for any damage to the vehicle to bring it into condition for resale, Drury noted. The disposition fee is spelled out in the lease agreement. The fee can vary from a few hundred to several hundred dollars.
“If you buy out the vehicle, there is no disposition fee,” Drury said.
Even if you don’t want to keep the car, many drivers could make money by buying the vehicle at the end of the lease and then trying to sell or trade in that vehicle themselves. It’s a strategy that’s been discussed and used by many for more than a year.
“This is a very, unusual situation,” said Jesse Toprak, chief analyst at Autonomy, which offers electric vehicles through car subscriptions in California with plans to expand elsewhere.
Toprak, who has been following the auto industry for about 25 years, said he’s never seen a situation where market values for used cars rose so dramatically and created this unusual opportunity for those leasing a car.
Consider if you leased a vehicle three years ago, he said, and the MSRP or sticker price was $40,000 and the expected resale or residual value was $20,000. The exact prices would vary by model. It’s possible in this environment, he said, that the car you’ve been leasing is now selling for $28,000.
“You can purchase the vehicle for $20,000 and sell it for $28,000 and pocket the difference,” Toprak said.
If you’re looking to make money, though, research other potential hurdles and costs.
If you need another car, for example, what will you drive? Will you be able to easily find another affordable car?
Here are some points to consider:
Know the market for your car or truck
“There are still cars that are not necessarily worth buying at the end of your lease,” Toprak said.
Know in advance, he said, if the residual value on your car is $20,000 but you might only really get $15,000 by selling it on the market.
If so, it’s not going to be a great deal to buy at the end of the lease and then try to sell it on your own.
Yet if you need a car or truck to drive, he said, it might be tough to find what you’d like for less than $15,000 given that many consumers are paying high prices for used cars now.
As of late June, there were 123,451 used cars available for sale under $10,000 nationwide — amounting to a 33-day supply, according to Cox Automotive.
For contrast, there were 791.002 used cars available priced at $35,000 or higher nationwide, a nearly 62-day supply.
Shop around for financing
“A lot of people who are buying leased vehicles don’t necessarily have cash sitting around or they don’t want to tie it up,” said Toprak, who bought out his own leased vehicle recently, too.
He recommends contacting the financing company to see if it’s possible to get as low of a rate as possible. And reach out to credit unions, he said, which are building up their market share of car loans, to see if you might snag a better rate.
One consumer who bought a Ram 1500 truck off lease in July was offered a 7.5% rate to finance the lease buyout from one lender initially but after shopping around found a rate of around 5% on a 60-month used car loan through a local credit union.
The average 48-month used car loan rate is 5.32%, according to Bankrate.com.
Lately, some lenders are advertising up to 60-month used car loan rates that can start around 2.5% if you have an excellent credit score and agree to make automatic monthly payments from a checking or savings account.
Rates can climb higher from there and go to around 8% or more if you have a good credit score in the 700 range, according to Greg McBride, chief financial analyst for Bankrate.com.
Weak credit, though, can mean you might only qualify for a used car loan rate of around 17.5% or more.
Try not to focus only on the monthly payment
Ideally, you’d want a shorter-term loan to reduce how much you pay overall in interest, especially if you plan to keep the car for a while.
Many consumers, though, are hyperfocused on their monthly car payments and then end up stretching out the car loan for five years or more.
The monthly payment, for example, would be $509 on an 48-month car loan for $23,000 — based on an annual percentage rate of 3%. The total interest paid: $1,436.
The payment drops to $413 a month if the loan runs 60 months or five years. The total interest paid: $1,797.
That’s an extra $361 in interest, money that could be spent better elsewhere.
Know that high prices don’t last forever
Toprak expects that the used car market will still be squeezed on supply, keeping prices high in the next few years or so and likely even drive prices up.
But unexpected twists can happen to drive down demand and prices; nothing is guaranteed. Odd situations can change quickly.