What Happens When I Return a Lease With Equity?

A lease contract for a car allows you to drive the car, make payments for a certain number of months and then turn the car back in to the leasing company. The lease contract spells out the framework of the deal at the end of the lease, including the projected value of the car. The dealer will refer to this value as the residual value. If the car is worth more than the residual value listed in the contract, then this is your happy day. You can use that equity to purchase the leased vehicle or put it towards another car.

At the end of a car lease, you have the choice of two options for dealing with the car. You can turn the car in to the leasing company. The company will inspect the car and charge you for any excess mileage or wear-and-tear as outlined in your lease. If you surrender the vehicle, you will lose any equity that you have in the car. Your other option is to buy the car at the residual value stipulated in the contract. This option allows you to cash in on any equity you may have in the car's value.

Your lease contract gives you the option to buy the car at the residual value. If the car is worth more than the residual value, you can sell the car and keep the difference. The lease residual value is the anticipated wholesale value of the car. If you sell the car at or near retail prices, you could make a tidy profit. The problem with this approach is that you need enough cash to pay the residual value and any sales tax on the purchase price. You also need a buyer who is willing and able to pay a fair price for the car.

Of course, you may also buy the car for the residual price and keep it for yourself. The cost to you will be less than buying a similar used car from a dealer. If you leased the car new, you'll know it's entire history and exactly who put those dings in the fenders and stains on the carpets.

There is another option. If you have equity in your leased car, you can trade the car in and use the equity as a down payment on a new car. This is how that sort of deal works: Instead of turning in the leased car, the dealer buys the car from the leasing company at the residual price. The dealer then applies your equity in the car toward a new car purchase or lease.

Trading the leased car avoids the lease turn-in inspection and subsequent billing. It also lets you benefit from your equity in the car even if you can't afford to purchase it outright or don't want to find a buyer on your own. The downside is the dealer will give you wholesale value for the leased car rather than the retail price. Getting your equity out of the car is easier and faster with a trade, but you won't get quite as much as you would if you sold the car yourself.

Check on the actual value of your leased car before you commit to any course of action. A dealer who sells the same make as your leased car can give you a buy bid based on the car alone without trading for a new car. That is the base value from which to compare to the residual value and the possible price you may receive selling the car on your own. If the buy bid is well above the residual value -- $1,000 or more -- you most likely have enough equity in the leased car to either sell it at a profit or use it as a trade-in down payment. Also, check the lease contract for any fees that apply if you buy the car or if a dealer buys out the lease instead of turning in the car.