The Expert Podcast

As you've probably seen in the news, used car values are going through the roof and, according to many financial gurus, are expected to keep climbing throughout 2022 because of inventory shortages. This applies to both new and used cars. You can drive by car lots in your neighborhood and see that the lots are empty, with both used cars and new cars. The cost of both new and used cars is expected to remain higher than average. Increased prices are attributed to high demand and skyrocketing prices for new and used cars.

Well, how does that affect you if you are leasing a vehicle and you're getting to the end of your lease? There are some very important things to keep in mind when you're thinking about what to do if your lease is coming to an end. First of all, if you don't buy out your vehicle, you have to find another car. In this market, whether you look at a new car or used car, the replacement might be much higher. You won't be able to get as good of a deal on it because new cars are sometimes priced over sticker price. You're lucky to get it for MSRP, and some used car values are now higher than they were when they were brand new. So, you probably have a significant financial opportunity that you're not even aware of.

Your lease for a vehicle, whether it's through Toyota or Hyundai or even private leasing companies like US Bank, has what's called a lease and buyout option, sometimes called a residual value. That dollar amount was set in your contract when you originally set up your lease. So, when you leased your vehicle two, three, or four years ago, you had a buyout option set for you at the time you did that lease, and it's fixed. It can't change even if the value of the car goes higher. The leasing company or the manufacturer is not allowed to change that buyout option. You're allowed to buy it for that contracted price, period, in most leases. So, you now have a secret inventory vehicle option that you can take advantage of, whether you want to keep your car or not.

You want to look at that option because it could benefit you in a number of ways. The other thing to keep in mind is if you buy your vehicle at the end of your lease and exercise that option, you do not have to pay any of the other penalties that might be in play. For example, if you have high mileage, there's a mileage penalty. If there's damage on the vehicle, you don't have to pay for the damage because you're buying the vehicle. Those charges that the lease company puts into the lease, like excess mileage or excess wear and tear damage, only apply if you turn the vehicle back into the leasing company. So, if you do have high mileage or damage, be aware that this might be a good way to avoid those costs.

Also, be careful about a trick that some dealers will use: the turn-in versus trade-in. If you trade in a vehicle, you get to keep the equity in the vehicle. For example, if your lease buyout option is twenty thousand dollars and right now your vehicle is worth twenty-three thousand dollars, if you trade the vehicle in, that three thousand dollars gets applied to your new purchase. If you turn the vehicle in to the lease company, you're just walking away from it. If there's high mileage, you've got to pay for that. If there's damage, you've got to pay for that. But what happens is the dealership gets to keep the vehicle for that turn-in value, so they get to buy it for twenty thousand dollars versus twenty-three thousand dollars. So, what do you think they're going to try to suggest or what they're just going to do without your knowledge?

Be aware that there's a difference between a turn-in and a trade-in. You don't want to waste equity in your vehicle by just doing a turn-in if you could do a trade-in. The difference is that a turn-in is just walking away from your lease—here's the keys, here's the car, I'm done. A trade-in is when you say, "Hey, you pay me what the vehicle is worth, twenty-three thousand dollars. My buyout option is twenty, deduct that, and the three thousand-dollar equity I get to keep or I put it towards my next car." Make sure you're aware of all your options, and to do that, you have to know what the value of your vehicle is now.

What if you want to keep your car? If it's worth twenty-three thousand dollars and you have a buyout option for twenty, just buy it for twenty and consider yourself ahead of the game. What if you don't need another car, and this is an extra car? Well, that’s where it gets a little tricky, but there is a way to do it. First, exercise your buyout option even if you don't want to keep the car or you don't need another car. Just exercise the buyout option for twenty thousand dollars, then sell the car for twenty-three thousand dollars and pocket the difference in cash.

Where can you sell it? A lot of times, the dealership will want to buy it, even if you're not buying another car from them. If it's not the dealership where you got it, maybe it's CarMax, Carvana, Drive, or Vroom—one of the other companies you see advertising all the time now that they'll buy a car without having to sell you one. Be aware that some leases have built into their contract a provision that if somebody else is going to pay off your car, you have to go through the dealer. If that's the case, then you just buy it and then resell it later. There's no restriction on that. Sometimes, the lease company will try to pull a fast one and say, "Well, if you're going to sell it to somebody, you have to sell it to the dealership first or go through our process." If you just buy out the car and forget about what you're going to do later, they don't have any control over that. Once you buy out the car and get the title, now you can go sell it somewhere else and pocket that difference.

Be aware that you have to look at sales tax because whatever you pay for the car as your buyout option—twenty thousand dollars, let's say—if your state has a sales tax on used vehicles, you'll have to pay that. So, if it's six percent sales tax on twenty thousand dollars, that'll be twelve hundred dollars that you'll have to pay. If the profit you would have made isn't that much more, then it might not be worth doing. But if the vehicle is worth twenty-three thousand dollars or twenty-four or twenty-five thousand dollars, paying twelve hundred dollars in taxes is worth keeping that equity. It's a little bit of a bureaucratic or administrative issue you have to deal with, but it is something that you could do.

How do these lease companies work? Each company has a lease kit. Just because your lease is coming to an end doesn't mean we have to say goodbye. It'll give you your options, like a vehicle return checklist. If you want to return it, you have your vehicle inspected, and you can schedule a turn-in appointment at your dealer. If you're turning it in, you have to go back to the dealer or a licensed dealer in that franchise. Clean your vehicle, remove any garage door openers, and any personal items. Keep copies of receipts for service because they're going to want to see those. Bring copies of your vehicle inspection report.

Make sure that if you go to the dealer, you get a receipt for how the vehicle was turned in. You don't want to find out later that you're getting a bill for excess wear and tear because things weren't inspected at the time. Most of these dealer agreements or lease agreements, like Toyota's, have a provision about what is considered wear and tear. A rip is excess wear and tear, while minor damage is not. Every manufacturer can be a little different. If you have a small tear versus a big rip, it's going to be treated differently. Look at your lease guide, and if you have a nick or a scratch, it's going to be okay. But if your vehicle is torn up, then it's not going to work.

Again, they give you options: What would you like to do at the end of your lease? Purchase your vehicle, lease, or purchase a new Hyundai. You notice it didn't say "turn it in" because three or four years ago, when they were doing leases, they didn't want you to turn it in. They either wanted you to buy it or lease another one because they were putting residual values and buyouts that were kind of high. That was their way of getting you into the new car. But now, some of these lease residual values turn out not to be that high after all. Purchasing your Hyundai? If they could redo this again, they would probably make it more likely that you'd turn it in because they want the car back.

Dealers and manufacturers have skyrocketing prices and their demand for cars is on the rise because they can't get cars at the dealership or the manufacturer. So, getting a lease turn-in would be a great thing for them. So, don’t waste your car by just giving it back to the dealership if you could make more use for the equity or buy it yourself and drive it for another couple of years. It's very unlikely you'd be able to buy that same car for the amount of your option in the open market. You’d probably have to pay thousands more.

Lease options are a huge opportunity that a lot of times aren't being disclosed by the dealership because they want to keep your car. What they call "glomming onto your car," they want to swallow it up so you don't get the benefit of the equity. They get to buy a car cheap. So, if you have a vehicle that's getting to the end of the lease, you can look at our website, leasequotes.com. You can get free quotations on what you might gain by buying your vehicle or keeping your vehicle versus just giving it back to the dealership and handing them a perfectly good, low-mileage vehicle.

One way to find out what your vehicle is worth is to find a vehicle like yours for sale at a dealership. Look at what it's selling for. You may see that vehicle, that has a buyout of twenty thousand dollars, being sold for twenty-nine thousand dollars at a dealership. Now, you're probably not going to get the full retail value because they have to make a profit, but you might get twenty-four or twenty-five thousand dollars if it's retailing for twenty-nine thousand dollars.

Lease buyouts are affected dramatically by this used car explosion of value. When leases were being issued two or three years ago, they didn't count on this. They didn't think this was going to happen. Even some of the captive banks that don't sell cars, like US Bank, have end-of-lease options, and it tells you how to return it. Your options are to buy it or turn it in. It doesn't matter where your lease is from. Look at your residual value, and buyout option, and see where you stand compared to the market. You very likely have thousands of dollars in unrealized equity that you could use to put cash in your pocket, buy the next vehicle, or buy a car for cheap.

The dealer is probably not going to go out of their way to tell you about it. They're going to say, "Yep, lease send checklists, give us your car, give us your keys, pay for the wear and tear," because they want your inventory. They're desperate. They're begging to put cars on their lot, and your car would be perfect inventory for them