Buzz
With used car sales rising 15% last quarter, your leased vehicle might be worth more than its buyout cost. With the right approach, you could make a profit. Here’s what you need to consider.
Evaluating the Worth of Your Leased Vehicle
When you lease a car, you're essentially paying for the privilege of driving a vehicle you don’t own. Your monthly payments are based on the car's estimated residual value, which is the projected worth at the end of your lease term.
The residual value of a lease is determined as a percentage of the Manufacturer’s Suggested Retail Price (MSRP). For instance, a leased car with an MSRP of $25,000 could have a residual value of 50% after a three-year lease, meaning the residual value would be $12,500. At the lease's end, you can either return the vehicle or buy it for the remaining value (sometimes with an additional $300-$400 “disposition fee”). You also have the option of an early buyout, which includes the remaining payments and sometimes a termination fee.
The pandemic has introduced a new twist. Due to a car shortage and various other factors, a gap has appeared between the market value and the residual value of leased cars—many vehicles now have a residual value lower than their selling price on the open market.
The Detroit Free Press provides a breakdown of potential profits:
For example, a 2017 Ram 1500 has an average residual value of $24,073 when leased, according to Edmunds data. However, on the open market, it could sell for an average of $28,292, resulting in a potential profit of approximately $4,200.
The 2017 Toyota Prius Prime has a buyout price of $14,971, but it can sell for an average of $17,840 on the open market, giving you a gain of over $2,800.
How to Find Equity in Your Vehicle
To determine whether a buyout makes sense for you, it’s important to understand how much equity can be extracted from your lease. Follow these steps to figure it out:
Review your lease contract or reach out to your lender to confirm the buyout (or early buyout) price. Additional charges may apply if your vehicle has excessive wear and tear.
Compare the buyout price to your vehicle's current market value using online tools such as Kelley Blue Book or Edmunds, or by getting an actual cash offer from online car dealerships like Carvana or Vroom.
Deduct the residual value from the market price to determine how much you might make from selling your car. Whether this difference is worth the effort of buying and selling is up to you, and you’ll also need to account for your time and expenses if you plan to sell privately.
If the numbers work out, you can go ahead and buy out your lease and sell the car either to a dealer or privately. Keep in mind, selling the car is your responsibility, and market conditions could change, which introduces some risk.
