What Are Your Car Lease-End Options?
When your car lease is about to end, you probably are wondering about the next steps. As soon as the monthly payments end, you will face one final payment, the residual value, and you must take a decision on it.
Your final move depends on the type of lease that you signed (open-end lease or close-end lease) and the equity on the vehicle (price of the buying option vs. fair market value), but here are the options offered to you:
- Buying the vehicle
- Returning the vehicle
- Extending the lease
- Trading in the vehicle
In most car leases, there is a buying option at the end of the term at the price of the residual value, plus other fees. You could also trade it in for a new lease or a new purchase. The opposite choice would be to return that vehicle to the owner. You can always renew the lease, which implies that you extend your monthly payments and get a new residual value after adding the extra months.
It is important when the lease-end approaches to analyze your situation in order to take the right decision. First, find out the fair market value of the vehicle you are renting. You may have cumulated some equity on the vehicle, or, on the contrary, the market value of the vehicle may be lower than the residual value. For each situation, your decision won't be the same.
If the equity on the vehicle is positive when the buying option comes at the end of the term, i.e. the market value surpasses what it cost to buy it to the owner (residual value + taxes and other fees); it is advantageous to exercise your buying option. You could resell it after and make a profit!
You also have the option to trade it in and apply this equity on a new lease vehicle or purchase. In that case, the dealership buys the vehicle that is not yours, so you will save on the sales taxes, but you will be at the mercy of the price the dealership is prepared to offer you.
The other option would be to not exercise the buying option and return it to the owner. This option, if there is positive equity, is not in your favour, since you will give the owner the profit that you could have made. However, in an open-end lease, you would be able to receive a check from the owner for the difference.
Re-leasing the vehicle will extend the payments for a few months. The outstanding balance will decrease and the vehicle will continue to depreciate; it is hard to say if the positive equity will increase after the extra time provided to you. At this point, it is only speculation.
A negative equity means the cost to buy the vehicle in the agreement is actually higher than what is worth on the market. In that case, returning the vehicle to its owner at the end of the term is the smartest thing to do in order to avoid a loss.
Returning the vehicle in a close-end lease will be done without any problems, only the excessive mileage charges and damages above and beyond wear-and-tear will be applied. You will avoid covering a loss if you respected the agreement during the time you used the car.
However, there is little difference in the case of an open-end lease, because the agreement made you responsible for the residual value and you will have to pay the difference between the book value and the market value, plus the applicable taxes. You won't get out of it either if you decide to trade-in the vehicle; the negative gap will be added to your next lease and your future monthly payments.
Re-leasing, if the option is offered, will just postpone the problem. It is possible however, with the extra time provided, that the outstanding balance will decrease faster than the value of the vehicle, which would work in your favour, but it could also go the other direction and worsen your situation. Again, this is only subject to speculation.
What is the best option?
It all depends on your current situation. The best thing you could do is to start getting informed on the market value of the leased vehicle and familiarize yourself with the type of lease you signed for. After that, you only have to calculate your lease-end options.