End of Lease: What You Need To Know

By Chris Hardesty 03/22/2023 12:00pm


Quick Tips About End of Car Lease Options

  • Returning the car at lease-end is the typical choice for most lessees.
  • End-of-lease options include buying the car for the predetermined residual value.
  • The lease buyout option isn’t a good choice if the car’s residual value is more than the market value.
  • Extending the lease for a few months might be an option if you need more time to find another vehicle.

A slow comeback from the computer chip shortage and other challenges remain in the automotive industry’s long road to recovery. What does it mean if your car lease is ending soon?

Read on to learn about end-of-lease alternatives to consider, including the potential benefits of buying your car at the end of leasing.

Factors To Consider at End of Lease

Is your vehicle lease ending soon? If so, you have a lot to consider. New car inventory is up substantially from 2022 levels but still low by historical standards. At the same time, prices for new cars are down slightly from December’s record high but still more than 5% higher than a year ago. Meanwhile, car shoppers must contend with economic headwinds and rising interest rates.

These factors create a unique situation for drivers with leases that expire soon. It was common for most consumers to return the car at the end of a lease in past years. Today, lessees who signed contracts before or during the pandemic should carefully evaluate other end-of-lease options.

Car Depreciation and Residual Value

With a lease, you make monthly payments for a contracted number of months. Instead of paying down a loan and building equity, you are paying for the car’s estimated lost value (depreciation) during the term (length) of the lease.

After factoring in depreciation, the car’s residual value remains. It’s the estimated amount the vehicle is worth at the end of the lease. In other words, it’s the buyout price and what you’ll pay if you decide to purchase the car when the lease terminates.

The residual value is calculated in your contract as a percentage of the car’s MSRP (manufacturer’s suggested retail price). Whether it’s a percentage or a specific dollar amount for the purchase option, it’s important to note that the financial institution holding the contract estimates the residual value at the beginning of the lease.

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Lease Buyout Price vs. Market Value

Crunch some numbers if your lease is about to terminate. Use our car value calculator to see a range of what you might get for your vehicle. There’s a possibility that the car you leased in 2020 has a lower residual value than the current market value for that model.

The reason is that used car values rose rapidly in 2021 because of high demand due to limited new car inventory on dealership lots. An analysis by Kelly Blue Book’s parent company Cox Automotive found that by the end of 2021, the average used car in America sold for $28,205. That’s 28% higher than it was just one year before.

So, consider the purchase option if you like the car you’ve been driving and if it hasn’t given you problems for the past two or three years. You might be able to buy it for significantly less money than a comparable model would cost if you found a car for sale.

What to do at the end of a car lease depends on several factors and your unique situation. However, one thing is certain: The buyout option isn’t a good choice if the car’s residual value is more than the market value at end of lease.

Drawbacks To Purchasing Car and Selling for Profit

If you use the buyout option to purchase the leased vehicle, you may be able to sell it to another individual for a profit. It might be worth your effort if the money is significant. However, the necessary paperwork and the potential for you to owe tax discourage some private sellers.

Car Availability Can Still Be Scarce

What will you do for your next set of wheels if you return the leased car or purchase it to resell? Remember that vehicle inventory can be spotty for specific trim levels with the options and color you want. Many buyers turn to factory orders to get the model equipped with the desired features.

However, inventory levels have reached the point where incentives are returning. Manufacturers typically subsidize sales promotions and leasing specials to help move slower-selling models. During the past two years of lighter inventory and increased demand, vehicles of all types moved off dealer lots quickly without incentives. You might find a good lease deal in today’s market, but locating the exact model you want can be challenging.

Extend Your Car Lease

Suppose you’re approaching the end of your lease, and you would like to start a new lease on a different car, but you haven’t found the right vehicle. Most lessors will extend the lease on a month-to-month basis or for a fixed number of months. You will have to continue making the monthly payment and probably need to sign another contract for the extension.

Editor’s Note: This article has been updated since it was originally published.