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. This is known as the "residual value" in lease-speak. If the car is worth more than the residual value listed in the contract, then this is your happy day -- you may be able to use your equity in the car, which is its actual value minus the residual value.
End of Lease Options
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 and pay any fees on such things as excess mileage and/or wear-and-tear as stipulated in the contract. A turned-in lease vehicle will be inspected. If any money is due to the leasing company, you will be sent a bill. But the leasing company does not pay you for any equity you might have in a turned-in lease car. Your other option is to buy the car at the residual value stipulated in the contract. Ah ha! This option allows you to cash in on any equity you may have in the car's value.
Buy and Resell
Your lease contract gives you the option to buy the car at the residual value. If the car is worth more than the residual, you can sell the car and keep the difference. The lease residual value is the forecast wholesale value of the car, so if you sell the car at or near the retail price, a nice profit is possible. The problem with this approach is that you need enough cash to pay the residual value and you will probably have to pay sales tax on the purchase price. You must be able to sell the car for enough to cover the additional costs and still put some money in your pocket. Of course, you may also buy the car for the residual price and keep the car. The cost to you will be less than buying a similar used car from a dealer. And you will know exactly who put those dings in the fenders and stains on the carpets.
Trade For A New Car
There is another option. If you have equity in your leased car in relation to the residual value, you can trade in the car 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, then gives you a down payment credit for your equity, which he applies towards your new purchase or lease. Still with us? Good. Because trading the leased car avoids either the lease turn-in inspection or coming up with enough money to buy the car for the residual value. The downside is the dealer will give you wholesale value for the leased car. So the bottom line is that your equity in a car with a deal done this way will be less than if you sold the car for the retail value. But there's always a downside -- you knew that, right?
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.
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