Consumers wondering whether to lease or buy a new car actually have a third alternative — they can sell the car they leased.
“When you lease a car, you own it,” said John Thompson, general manager at Arbogast Buick-Pontiac GMC in Troy, Ohio. “So you can do anything you want with it. If the residual value is high, you can sell it. But once you make that last payment, the bank owns the car.”
“But if you come in here with a leased vehicle that has a wholesale value of $12,000, and a residual value of $10,000, then I’ll buy the car and give you a check for $2,000 as long as the lease isn’t up.”
Consumers can make a profit selling lease cars
Don Taylor is a savvy consumer who sold a leased car. The treasurer of the Palm Beach County School District in West Palm Beach, Fla. leased a 1995 BMW. About six weeks before it was time to turn in the car, he brought it to a used-car dealership and bought a Miata. The dealer paid off the residual value of Taylor’s car, and he drove off the lot in his Miata. He also pocketed $100 in profit and got his $375 security deposit back.
Taylor says the reason he just didn’t turn the car back in is because he was worried the lessor would find some reason not to give him his deposit back, such as a nick or dent in the vehicle. The key for Taylor was that he turned in the car before the lease expired.
There are two kinds of leases: open-end and closed-end. On a closed-end lease, the dealer guarantees the residual value of a car. On an open-end lease, the owner guarantees the residual value of the vehicle.
Differences in lease types are important
Why is that important? A few years ago
Consumer Reports Magazine evaluated a certain car and said it wasn’t safe. The article said that hitting a watermelon in this vehicle would be life-threatening. That sort of publicity doesn’t do much to raise the residual value of the car. So on an open-end lease, the owner might be liable to make up for any decline in that residual value.
On a closed-end lease, residual value can be a positive factor. The owner is guaranteed that value upon turn-in, unless the car looks like it barely survived a nuclear holocaust.
On the other hand, if for some reason the car is worth more than expected, the owner has the opportunity to sell it and make a profit. Not a lot of lessors know about this option because it is usually not explained to them when the contract is signed. The original dealership, of course, wants you to either buy the car from them, or lease another vehicle.
Pay attention to contract details
“Your contract will tell you what the buyout value is at the end of the lease,” said a Nevada State Farm Insurance agent who requested anonymity. “Then, compare that to market value. Market value will vary from region to region; for example, market value is higher on four-wheel drive vehicles here than the (Kelly Blue Book) value indicates, just because they’re in such high demand.”
The agent said that the consumer would be wise to have that pricing knowledge in hand when approaching a car dealer to try to sell the leased vehicle.
“Most dealers are very good about acknowledging higher market value, but it helps to have documentation of this in hand when you walk in,” the agent said. “Sometimes they’ll give you as much as $2,000 off on your next lease, or they’ll take that amount off your vehicle purchase.”
Good credit affects residual value
People with good credit typically get better lease terms than consumers with a history of financial distress, and that will directly affect residual value at the end of your term, he added. “Most leases these days are closed-ended, and you can come out of the lease with pretty good residual, depending on your credit.”
There are other complicating factors that will make a lessee’s head spin. While the monthly payment rate is lower than when purchasing a vehicle, extra costs can be incurred if you drive too much. Dealers say that generally, there is a “ceiling” of 15,000 miles a year. Anything over that, there is what might be called a “surcharge” of 10 cents a mile. Thompson says there is even a requirement that so much tread be left on the tires.
Of course, the biggest fear of lessees is that they could get in an accident. Even if it’s not your fault, the car might never be the same after a wreck. But Mike McFall, a GMAC spokesman in Detroit, underplayed those fears.
If you wreck, restore the car as best you can
“If you have an accident, it’s your responsibility to restore the car as best as possible before turning it back in,” he says. “You obviously have to be insured. So just take it to a reputable body shop and get it fixed. They can do the job.
“But if you have your brother-in-law just pound out the car, you might have a problem. The bottom line is don’t have your brother-in-law pound out the car.”
Why bother with these issues?
Leasing usually cheaper than buying
“You’ll probably save up to $50 a month if you lease rather than buy,” says Dave Warren, sales manager at Troy Ford in a suburb of Dayton, Ohio. “And you’ll also be driving a new car every three years, or whatever is the term of your lease.”
With the average purchase price of a new car hovering in the $20,000 range, leasing is becoming an increasingly attractive option for car buyers. It’s estimated that about a third of the new cars driven off the dealers’ lots are now leased.
“You’re going to save about 30 percent in payments if you lease a car rather than buy,” says Randall McCathren, executive vice president of Bank Lease Consultants in Nashville. “So you just need to look at your monthly budget and see if it makes sense for you.
“The degree the vehicle is used is also a factor. If you drive a lot, the cost could escalate. But generally in leasing, for the consumer, it’s “heads I win, tails I win.”