When it comes to the end of a car lease, you have a few different options for what you can do. To make the best choice possible, it’s important to understand a few factors that go into the different lease-end options you have at your disposal.
Deciding what to do at the end of a car lease depends mostly on how you feel about the car. Of course, your financial situation and inclinations also come into play. We’re about to explore each of the options available to you as your lease ends.
What to Do at the End of a Lease: Return the Vehicle
When you return your leased car, it will be thoroughly inspected, this is called the “lease-end inspection,” and it’s important to understand that you may be charged fees for excessive wear and tear to the vehicle. When you take your vehicle to the dealership they’ll be looking for:
- Scratches or dings on the exterior
- Cracks or other damage in any of the windows
- Any form of damage to the interior of the car, such as burns or rips
- Excessive wear on the tires
Before you head for the dealership, you should ensure you have everything that came with the car to avoid additional fees. This means you’ll want to bring both sets of keys, make sure the spare tire is in the trunk, have the original floor mats in the vehicle, etc, etc.
If you plan to simply return the vehicle, you should also be prepared to pay the lease disposition fee, which is often around $400 (although the exact amount is on your lease contract). This fee is to cover the costs of reselling your leased car, and if you plan to return your vehicle (and not lease another vehicle from the same manufacturer) you cannot get out of paying this fee. If you went over your mileage allotment expect to get a bill sent to you, and if you’re terminating your lease before it’s over, expect even more fees (as well as the reality that you’ll still need to make your remaining lease payments).
What to Do at the End of a Lease: Move into a New Lease
Let’s say you want to return your car and then get a new lease. That is of course also an option, and one the dealership will be excited to help with. It’s likely that the dealership has contacted you in the months leading up to your lease-end to try and get you into a new lease already, and so by the time you show up to return your vehicle you may have already put together your new lease deal.
When you return a vehicle and then lease another from the same manufacturer they will waive the lease disposition fee. The vehicle you are returning will still need to go through a lease-end inspection, and you’ll face fees if you don’t have the second set of keys, or went over the allotted mileage.
You may be able to roll any lease equity over into a new lease as well. Lease equity is the positive equity created when your car is worth more than the residual value stated in your lease terms. Lease equity typically only occurs when you have severely under-driven the mileage stated on your lease, or when you simply get lucky because of an increased demand for your specific car.
For example, let’s say you lease a Honda Accord, and the stated residual value at the end of the term is $15,000. You lease it and barely drive it during the 36 month lease. You head to the dealership to return your current lease and move into a new Accord. When you arrive the dealership lets you know that the vehicle’s “book value” (how much they’re willing to buy it for) is $16,000. Rather than return the vehicle, you work with the dealer to buy it, trade it in, and roll over the equity ($1,000) into the new lease.
Many people who lease cars decide to move into a new lease with the same dealership. While reasonable, you should shop around before jumping into another lease. Like we always preach, you should negotiate the largest dealer discount from MSRP before committing to a car deal.
What to Do at the End of a Lease: Buy the Car
If you’ve enjoyed your leased car you always have the option of buying it outright at the end of your lease. You know exactly how much you’re going to pay for the car (the residual value set when you signed the lease contract), and you know everything about the vehicle (since you’ve been driving it for the past few years).
The residual price is in your leasing contract and was determined based on their estimation of what your car would be worth at the end of the lease. Comparing the residual value against the current market value is often the deciding factor for people considering buying their leased car.
For example, John leases a Toyota Prius, and at the time the contracts are drawn up, the manufacturer calculates that the Prius will be worth 58% (residual values are always represented as percentages) of its original MSRP. That means John can buy his Prius outright, at the end of the lease for $17,000 (remember, this is a hypothetical). Because of market conditions, and the fact that John only put 18,000 miles on the Prius, he knows the vehicle is worth $20,000 if he sold it to a private party, or $18,500 if he sold it to the dealer. These figures mean John should almost certainly buy the car since it’s $1,500 cheaper than the market rate.
However, if John’s lease comes to an end and the book value on his Prius is actually $15,000, John would be paying an extra $2,000 over his Prius’ market value if he bought it outright at the end of the lease. In this case John would be better off turning in the leased Prius and buying one elsewhere for $15,000.
To Lease or To Buy?
One of the most challenging decisions people face when considering what to do at the end of a car lease is often the same decision that originally led them to their lease: should you lease it or buy it?
There are pros and cons to both options. Objectively considering both will ultimately help you decide what to do at the end of a car lease.
Should You Buy the Car?
People decide to buy cars at the end of their leases all the time. There are many good reasons why. However, there are also a few notable drawbacks.
- You have no restrictions on your driving habits (such as mileage allotments)
- Buying is often cheaper than leasing
- Monthly payments go directly towards owning the vehicle
- You’ll end up owning an older car rather than continuing to lease new cars
- The value of your car will depreciate the longer you own it
- Monthly payments are often higher than leasing
Buying a car usually makes more financial sense than leasing. One benefit of purchasing the vehicle that you’ve been leasing is that you know exactly how it’s been driven and maintained, as compared to buying a used car off the lot.
Should You Lease the Car?
Some people are serial car leasers. They’d never want to commit to owning the same car for longer than a lease. Let’s take a look at some reasons why.
- Every few years, you get to have a brand-new car stocked with cutting edge features
- Your car is always under warranty, which can save you a lot of money on repairs
- Monthly payments are typically lower than financing
- It’s more expensive than buying in the long run
- You’ll be given a yearly allotment of miles, and you’ll be charged if you go over it
- You don’t gain any equity since you don’t own it
You may notice that these pros and cons lists are quite similar to the lists you might make before you first got into a lease. That’s because deciding what to do at the end of a car lease is similar to deciding to start a lease in the first place: lease a new car or buy the one you’ve been driving.
Which Option Is A Good Fit for You?
Deciding between the three lease end options detailed above can often be tricky. It typically comes down to how you feel about the car. If you love the way it drives and you want to keep driving it, buying it is usually the best option, even if the numbers say you should turn it in. Conversely, if you dislike driving it and you’ve been counting down the days, it’s probably best to turn it in and walk away.
Now you know what to do at the end of a car lease, but you still have homework to do. You need to determine the car’s current market value and compare it against the residual price. The difference between these numbers will help you decide what to do at the end of a car lease.