When you lease a car, it's typically only for two or three years. After that, you have to decide whether to turn in your vehicle and lease again, or shop for a car to buy. If you aren't sure which direction to go, you could opt to buy your leased vehicle. But, is this the right time to do that in light of the coronavirus pandemic?
Lease Buyouts
If a lease buyout option is in your contract, it means you're able to purchase your leased car at the end of the term. The price of this buyout is determined at the start of your lease and is based on the residual value of the vehicle.
In a lease, you only pay for the depreciation, taxes, fees (collectively called capitalized cost), and interest (called the money factor) for the time you're using the car. To compute depreciation, lessors estimate how much the vehicle should be worth at the time your lease expires. If their calculations are correct, the actual value of the car when you return it should equal the buyout price of the vehicle.
Sometimes, however, things don't add up.
Perhaps the car you're preparing to turn in is worth more than the lessor anticipated, which leaves you in a good position to purchase the vehicle with equity in it. This can be a good deal because you're paying the pre-arranged buyout price for a car that's worth more than you're buying it for.
In some cases, though, the opposite is true. Sometimes, your leased vehicle is actually worth less than it was estimated to be worth at lease turn in. This can happen when used car values fall due to unforeseen events, such as the global COVID-19 pandemic.
If your leased vehicle is worth less than the buyout price, you can ask the lessor if they're willing to come down in price to match the value, but there's no guarantee they're going to agree to this.
Have Buyout Prices Been Impacted by COVID-19?
Used car values, and the price you're likely able to negotiate for your lease lease buyout haven't been impacted by the pandemic as much as originally predicted, at least at this point. When the market was first impacted by the coronavirus about six months ago, the future of the economy, and overall prices for goods and services, was uncertain.
But despite dire predictions, the initial drop in vehicle sales – down 19% from pre-virus levels for March, according to J.D. Power – wasn’t that bad. As the nation now starts to reopen, numbers for May show a poor, but much less alarming, 28% drop in car sales versus what was predicted pre-virus, according to J.D. Power.
With the industry recovering as a whole, the drop in used vehicle prices we experienced a few short months ago is starting to turn around.
When Should You Buy Out Your Lease?
Whether your leased vehicle is worth more or less than its residual value, deciding to buy it at lease end really comes down to you.
Do you love the car you're driving? If the answer is yes, then you should consider buying your vehicle. Be careful, though, because if it's worth a lot less than the buyout price, and the lessor isn’t willing to come down on price, you may run into trouble down the line when you attempt to sell or trade your car in.
Decided Lease Buyout Isn't for You?
If you're getting ready to turn in a leased vehicle now, whether due to a COVID-19 lease extension or if your lease is nearly complete, you should start thinking about what you want to do beforehand. Turning in your current car can mean leasing again or shopping around for another vehicle – both things you may be hesitant to do.
But, maybe you're not that into the current leased car you're driving. Or, maybe always having a vehicle payment isn't working for you anymore. Whatever the case, if you decide that now is the time to buy another car, Auto Credit Express wants to help.
We work with a coast-to-coast network of special finance dealerships that have the lenders opportunities you may need to get into an auto loan, no matter your credit situation. If you want to save yourself the hassle of driving from dealer to dealer looking for a lender that can work with your credit, start here by filling out our car loan request form. It's fast, free, and there's never any obligation to buy.
