The Expert Podcast

If you leased a vehicle in the last three years, you may have found that it turned out to be a very smart money move. Here's why: when you lease a vehicle for two or three, or sometimes four years, you make payments, but at the end of that term, you can walk away from the vehicle. This allows you to avoid another two or three years of payments, during which the car might be out of warranty, have high mileage, or simply no longer suit your needs. Most people only keep cars for two or three years and then flip them for a new one.

If you financed the car, you might owe more money than it's worth. However, if you leased the vehicle, at the end of the three years, you simply return the keys and walk away. Additionally, you have the option to purchase the vehicle. At the beginning of the lease, you are given a fixed, documented buyout amount, typically about half the car's original price for a three-year lease. For example, a $50,000 car might have a buyout option of $25,000 at the end of three years.

Up until the past couple of years, leasing companies accurately predicted the value of a vehicle after three years, often making it a break-even scenario. For instance, if your buyout option was $25,000, the car was likely worth the same amount. In some cases, the buyout option was even higher than the car’s value because manufacturers sometimes inflated this figure to offer lower payments, effectively discounting the vehicle without appearing to do so.

For example, luxury brands like BMW avoided flashy discounting tactics such as rebates or zero-percent financing, which might tarnish their prestigious image. Instead, manufacturers incorporated discounts into lease deals by raising the residual value. This allowed them to offer lower payments while preserving the car’s perceived value. The advantage for manufacturers was that if you bought out the lease, they didn't lose money on the artificially high residual value.

However, over the last two years, used car values have skyrocketed. Many people now find that their lease buyout amount is far below the car's market value. For instance, if your buyout is $25,000, the car might be worth $30,000 or more. This means that buying the car outright could result in immediate equity. Even if you don’t plan to keep the car, you could purchase it and resell it for a profit.

Alternatively, if you’re planning to get a new car, you can use a lease trade-in instead of a lease turn-in. A lease turn-in means you simply return the car and walk away, while a lease trade-in allows you to use the equity in the leased vehicle toward your next car. For example, if the car is worth $30,000 and the buyout is $25,000, the $5,000 difference can be applied as equity to your new vehicle purchase.

Buying out your lease can be a very smart financial move if the residual value is lower than the current market value. This is especially true in today’s market. However, if you lease a car now, this scenario might not apply in three years, as market conditions could change. So, while this is a great opportunity for those who leased cars in 2018, 2019, or 2020, don’t assume it will apply to new leases going forward.

If your lease is ending or coming up soon, check the residual value and make sure all paperwork is handled correctly. Buying out a lease involves transferring ownership, which is slightly more complex than a lien payoff. Done properly, a lease buyout can add equity to your next purchase or simply put cash in your pocket.