Understanding Lease Equity

Car leasing is normally not a money making proposition but it can be under the right circumstances

Car Buyers with Credit Issues

Understanding Lease Equity

Here at Auto Credit Express, we realize that for most borrowers, new car leasing with bad credit can be difficult to qualify for. But consumers that do – as well as those currently in a lease because they’ve re-established their credit – might want to know that a leased car could actually be worth more than its residual value.

So what is residual value and how does leasing work? – we’re glad you asked.

New Car Leasing

New car lease payments are based on two components. The first is the cost of interest which, in leasing, is called the money factor. The second is the cost of vehicle depreciation which is the difference between the selling price to the leasing company (called the “capitalized cost”) and the final value of the vehicle at the end of the lease as determined by the leasing company (called the “residual value”).

Lease payments are typically lower than traditional retail finance payments because leasing only considers the portion of a vehicle’s value between the capitalized cost and the residual value. Using the example of a 2 year lease, the person leasing the vehicle (lessee) is paying the interest expenses and the vehicle depreciation costs for just the first 24 months of a vehicle’s lifecycle.

Leases also come with a number of limitations, not the least of which is mileage. A maximum number of miles that the vehicle can be driven is written into every lease contract – exceed the number of miles and you’ll have to pay a penalty that typically ranges from 15 to 25 cents for every mile driven over the limit.

But what if the number of miles is under the limit at lease end?

Lease Equity

If the difference in the actual number of miles driven is significantly lower than what was written into the lease, the vehicle’s trade-in value (based on Kelley Blue Book, the NADA Used Car Guide and Black Book) if it’s in good condition (cosmetically and mechanically) could be more than its residual value.

In addition to just turning in the vehicle (which, if it’s worth more than the residual, is like throwing money away), consumers in this situation have a number of options including:

  • Buying the vehicle for its residual value (given its trade-in value this could cost far less than buying a comparable used car from a dealer) and continue driving it
  • Selling the vehicle to a dealer after shopping around for the best price offered (on both the trade and a new car) and applying the equity to a down payment on another lease or retail buy.

The Bottom Line

Typically, leased vehicles aren’t worth more than their residual value at the end of a lease. Consumers nearing lease end, however, should first check their vehicle’s value before turning it in; otherwise, they could be leaving money on the table.

One more tip: Auto Credit Express helps people with car credit problems find those dealers that work with bad credit and can give them their best opportunities for car loan approvals.

So if you’re ready to take that first step, you can begin now by filling out our online auto loan application.

Posted on September 14, 2014 by in Auto Loans
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