The Expert Podcast

So the used car values have fluctuated greatly over the last couple of years. In fact, for many cars, the values of used cars have spiked up dramatically, making it difficult to find reasonably priced used cars. But here's the thing: this is also affecting new car leasing.

Well, how could used car values affect new car leasing? Here's how: when you lease a new car, basically what you're paying for is the difference between what you pay for it new and what it's going to be worth in a few years. For example, if you lease a forty thousand dollar car for three years and let's say at the end of three years, it's going to be worth twenty-five thousand dollars, what that means is the depreciation of that car is fifteen thousand dollars. So, that fifteen thousand is all you pay because, with a lease, you drive it for three years and then you turn it back in at the end, and the value of the car in three years the leasing company gets to keep. You only pay for how much it goes down in value, which makes leasing very cheap because you're only paying for the part that it goes down.

Well, what's happening is the leasing companies have to guess what the car is going to be worth three years later. So if they, let's say, that it's a forty thousand dollar car and they guess it's going to be worth twenty-five thousand in three years, what if the car's worth thirty thousand in three years? Well, one thing about a lease is you have the option of buying that car for that guessed value. So, if they guess twenty-five thousand, you can do one of two things: you can either just turn the car in and walk away, or you can buy it from them for that twenty-five thousand, basically paying the rest of the car. Well, if it's worth thirty and you only have to pay twenty-five, you've got a deal.

What's happening, according to an article from CNBC, and we're seeing this in our automotive division, is cars leased are worth an average of four thousand dollars more than expected. So, the lease companies guessed wrong, which is good for you as a consumer because you have the option to buy that car. Even if you don't want to keep it, you can buy it for twenty-five thousand, sell it for thirty thousand, and pocket the difference.

So make sure that if you are getting to the end of your lease, that you don't just turn in the keys and walk away. Because if that car is worth thirty grand and you have a buyout of twenty-five, and you toss the keys to the dealer and walk away, now the dealer gets to make that profit. They get to own it for twenty-five thousand, they can sell it for thirty or thirty-five, whatever it is, and make the profit. You should keep that profit. So, make sure even if you don't want your car anymore, that you're not just walking away from equity.

Because the amount that the leasing companies guessed for the lease-end value, it's called a residual value, was way, way off. They were way low—not really their fault. The market went up a lot more than they thought it was going to. So what they guessed was reasonable based on historical values, but the market went crazy in the last few years. So, that's going to put you in a position of equity.

Now, here's another thing where that also may affect you: on a new lease, the leasing companies are starting to guess a little higher now because they say, "Hey, wait a minute, maybe these cars will be worth more." So, now maybe that forty thousand dollar car, they're going to guess it's going to be worth thirty thousand. So, now you only have to pay the difference of ten thousand instead of fifteen thousand. So, in theory, lease payments on new cars now might be cheaper than what they were before. It depends on the lease company. Some of these companies say, "Yeah, the lease values were higher before the residual values, but maybe it's not going to happen again," so they're still going to be conservative.

So, if you're looking to lease a car, shop around to see if there's a lease company that's maybe using a higher value. Either way, if you get to the end of the lease, don't just walk away from your car. Make sure that you're looking at your residual value and maybe not turning it in. Maybe you could trade it in. Maybe you could say to the dealer, "Look, I want to buy a new car, the car's worth thirty, my payoff is twenty-five, that five thousand, put it towards my next car." That's the difference between a trade-in and a lease turn-in. They both sound the same and they both look the same: you're bringing the car to the dealer and you're walking away. Just make sure they're not absorbing your equity without giving you credit for it on your next new car deal.