If you have a lease that’s about to expire, you may want to check out its equity – you could be getting some good news this year!
Car Leasing and Equity
When you lease a car, you pay for the time you’re driving it and for the depreciation – the loss of value over time. This means you usually don’t end up with any equity, which is the difference between what you owe on the vehicle and its cash value. Ending up with equity in leasing is rare, but when it happens, it can be cashed out or used as a down payment on your next car purchase.
With leasing, the amount you pay is largely determined by the residual value, which is an estimate of what the vehicle will be worth at the end of the lease. The residual value is an educated guess based on values of similar cars and other industry information, but it can still be hard to get an exact value. In typical circumstances, the residual value of the leased vehicle can be pretty close to its actual value – but 2020 is anything but normal.
Used Vehicle Values Are Up
Back in 2017, leasing companies likely didn’t predict that there would be a pandemic that would raise used car values when they calculated residual values (if they did predict that, ask them for lottery numbers). Because of the unforeseen circumstances that we’re all in, residual values are averaging lower than what models are actually selling for, which is good news for you.
When your lease expires, you usually have two options: you can either return the vehicle or you can buy it. If you’re the type of lessee that always turns in their leased car for another, you may want to reconsider this time around. If there's equity in your lease, you could make some cash in the deal.
Take a look at these values compared to residual values reported by Edmunds after a three-year lease term:
| - | Average MSRP | Average Residual Value | Average Private Party Value | Average Profit |
| 2017 Ram 1500 | $46,357 | $24,073 | $28,292 | $4,219 |
| 2017 Toyota Prius Prime | $44,042 | $14,971 | $17,840 | $2,869 |
These are just two examples, but many 2017 vehicles have a higher value than what was predicted. If you find that your leased car’s value is higher than its residual value, you could buy out the lease, then turn around and sell the vehicle for a profit. That extra cash from the sale could be used as a down payment for your next car – or you could just pocket the cash!
Or if you wanted to, you could buy out the lease and just finance the vehicle. This is also a good idea, since you’re getting a great deal on the car.
If your lease is coming to an end, take a look at your paperwork to find your residual value and compare it to the private party value of your vehicle. You can check your car’s value using Kelley Blue Book, Black Book, or NADAguides. These sites can be very useful since they can give you a quick estimate of what your vehicle may be worth. Just enter in your car’s information (accurately), and you can usually get a trade-in value and a private party value.
Why Are Used Car Values Up?
Used vehicles have higher value right now since they’re in high demand. One of the biggest reasons for this is the halt of new car production near the beginning of the year due to COVID-19 shutdowns. This caused new vehicle stock to plummet, pushing customers toward the used car market.
Another potential reason for the used vehicle craze is that they’re simply less expensive. The average transaction price for a brand-new car is around $39,000 according to Edmunds – that’s a lot of cash, especially during a pandemic. With so much worry and economic instability, taking on a nearly $40,000 auto loan appears to be too risky for many car buyers.
Your Next Vehicle
Whether or not you decide to lease again or buy is often dependent on your credit situation. If your credit score isn’t the best, you’re likely to run into issues getting approved for a vehicle lease or a traditional auto loan.
When you have bad credit, you’re likely to have better car loan approval odds if you work with the right lender for the job. Special finance dealerships are signed up with subprime lenders, and they specialize in assisting borrowers in tough credit situations.
If you’d like some help finding the bad credit lending resources you need for your credit, then start right now with us at Auto Credit Express. Over the last 20 years, we’ve created a network of dealers that are signed up subprime car lenders, and we want to match you to one in your local area at no cost. Get started by filling out our auto loan request form, and we’ll get to work for you!
