How to Profit from an Off-lease Car

By KBB Editors 05/13/2021 12:07pm

Profiting from a car lease agreement

Saying goodbye to a low mileage, off-lease car might be throwing away thousands of dollars. This is especially true with the recent run-up in used vehicle prices. That knockout full-size pickup, for example, might be worth purchasing and keeping, or purchasing and selling for as much as $5,000 above its residual value, the result of a red-hot truck market.

Knowing how to navigate the end of your lease term can mean money in your pocket. Here’s what you need to know to profit from the back end of a deal.

Know Your Residual Value Upfront

You may ask yourself: What’s residual value? In essence, it’s what the market will pay for your car at the end of the lease. While you may be able to find that number digging through your original paperwork, smart shoppers know that number upfront when they sign on the dotted line. Also, be sure that your lease includes an option to purchase the vehicle at the end of the term.

Keep in mind that this value may not be expressed as just one number. The residual value might be based on the wholesale price of the off-lease car at auction or the retail price, which is what the dealer will put on the car when it goes onto the used vehicle lot.

Mileage and condition are important in determining resale value. That’s why most leases contain excess mileage charges to compensate for a loss of resale value if you drive more than the allowed 12,000 to 15,000 miles per year. Whether or not you’ve exceeded the mileage cap may or may not affect your decision on buying the car at the end of the lease. And in the current market environment, if your vehicle is worth more than the residual value, it gives you additional leverage in negotiating any lease-end fees based on excess mileage or excessive wear and tear.

Appreciate Depreciation

Depreciation is the rate at which a vehicle loses its value, and it’s not the same for all makes and models. Some brands, like Honda and Toyota, do well in losing value at a slower rate than their competition. The same holds for vehicle types. Pickup trucks and SUVs generally depreciate at a rate slower than traditional sedans or economy cars. This is especially so during times when gas prices are low. The opposite will tend to happen when gas prices spike.

Find out if the new vehicle you’re considering is a star at minimizing depreciation. If it is, you can be sure the lease deal is a good one and that your car may worth hanging onto after the term expires. One way to check is through Kelley Blue Book’s Best Resale Value Awards, which recognizes the makes and models that perform best in the resale market. Also, check out our 5-Year Cost to Own data, of which depreciation is the largest component.

Picking a Potential Off-lease Car Winner

Once you’ve determined how well your off-lease car may perform on resale, make sure there is a provision allowing you to purchase the vehicle at the established residual price rather than prevailing market prices.

Currently, with new vehicle inventories constrained by the microchip shortage, the used vehicle market has seen double-digit growth in values just over the past year. This means that the retail selling price for a used vehicle is way higher than its residual value, a potential windfall to the lessee. The vehicles that are doing the best are full-size pickups and SUVs. These do extremely well in the secondary market. 

Under these circumstances, if you leased your vehicle two or three years ago, the residual value of your car or truck is considerably less than what it commands on the market today. The option to buy, in essence, allows you to buy a late model used vehicle at below-market prices. This is a particularly attractive alternative to buying or leasing a new vehicle in a market that’s seeing fewer incentives and higher prices. Also, that lease on a new vehicle will likely have a residual or buy-back price that reflects today’s overheated market.

What About Your Next Lease?

Lease deals are a way manufacturers use to put incentives on slow-selling vehicles without discounting or lowering the Manufacturer’s Suggest Retail Price (MSRP). By baking discounts into the lease, sometimes the monthly payment is lowered by raising the residual value underpinning the deal. That residual may or not reflect the real-world value of the car at the end of the lease term.

Exacerbating the situation is if the vehicle is overvalued. With today’s high prices factoring into the equation, the buyback of a new lease today may not reflect the real-world value two or three years from now.  If that’s the case, it may be best to take a pass on the deal or be prepared to walk away from the buyback when the lease ends. Then again, looking closely at the fine print, there are ways around a high residual buyout figure that could work to your advantage down the road.

All in the Family

While you may be only be offered a specific residual value buyout, some automakers may allow a family member to purchase the vehicle for less than that agreed price if the market value drops. The savings could be $1,000, $1,500, maybe more depending on the brand and model.

Chrysler Capital offers a similar off-lease purchasing program for a lessee’s spouse, family member, or friend. “Individuals not on the lease may purchase the car from the dealer at an agreed-upon price if the dealer opts to purchase the vehicle at market value at the end of the lease,” Chrysler Capital said in a statement. 

Be Open to Negotiation

The end of a lease doesn’t necessarily mean you are faced with a binary choice of either buying the car or walking away. While it’s true that you may be facing higher costs in buying or leasing a replacement vehicle, you can use the higher value of your lease return to your advantage.

If you have your heart set on getting a new vehicle, you can use the higher market value of your lease return in negotiating a lower down payment on a purchase or more attractive lease terms on a new vehicle.

Conversely, if you’re happy with your current vehicle, you may choose to work with the dealer to extend the terms of your existing lease, locking in your current monthly payment.

Remember that even though you don’t own your leased vehicle, it has value on the second-hand market. Your right to purchase it at a predetermined, below-market price can work to your benefit.