By the time you approach the end of your lease, there are a number of options available for you to make a choice. You can turn your vehicle in at the end of the lease, you can also buy it if you want, or even create a loan based on the residual price of the vehicle. And there is always the last option of terminating your lease early, which means you are turning over your lease before its term expires.
Let us brief you about all the options available at the end of the lease:
Early Lease Termination
This is always an option for ending your lease contract early. Most dealers will tell you that the only way to end a lease early is through “early lease termination” options. In this process of early termination, you are required to pay an early termination penalty plus the balance of the remaining payments. For example, if the monthly payment is $500 a month and 10 months are remaining on your contract, then you owe $5,000 plus any penalty fees.
When you turn your car in, these additional fees are often applied toward your trade-in, but the net transaction may cost you thousands of dollars.
Our advice would be not to pay thousands of dollars to exit your lease early as there are much more financially viable solutions. There are many other options to save your money from early termination penalties.
Extending the Lease
The other option at the end of your lease would be to re-lease your vehicle. Re-leasing your vehicle means extending your lease contract by 12-24 months. When you exercise the option of extending your lease, your monthly payments are also adjusted. The new monthly payments can be re-adjusted depending upon the residual value of the vehicle and the new duration of the lease extension.
You can expect the new monthly payment to be slightly lower than your previous lease payments. This is because of the reduced value of the vehicle with every passing year. But there is also something to consider here: You may start to encounter some problems with your vehicle as you cross 60,000-mile limit. Most of the warranties expire at that point, this means your savings in the monthly payment may be offset by the excessive maintenance and repair costs. So do not expect to save any money in the longer run.
Purchase the Vehicle
Another option would be to buy out your vehicle at the end of the lease. There can be different reasons for that, like:
- You like your ride and you would like to keep it.
- You owe an excessive amount for extra miles and damage.
- You want to sell the vehicle to someone else.
Buying out your lease will require you to pay off the residual value of the vehicle to the leasing company. This may also include some remaining payments that you owe. You can do it two ways: Either through financing or by paying the cash. Financing is complicated as you have to approve a loan from a financing company and pay interest on the loan. You will also need to pay for the transfer of title, taxes on the vehicle, and for the tags.
Upgrade to a New Model (Trade-in)
One popular option at the end of the lease is to “upgrade” to a newer model. This can be a good option but like any other choice, it has certain conditions attached to it. You should choose this only if:
- You have no additional costs associated with the car (excessive mileage, etc.…).
- You are satisfied with leasing and want to enter another agreement.
- You had a positive relationship with the car dealer.
A dealer will apprise you that they can roll over your remaining charges into a ‘trade-in’ if you owe money at the end of the lease. This does not mean that the fees have been waived off, rather you just end up paying the remaining charges over a longer period of time including the interest on these payments. It would be better to manage all your payments well on time to avoid any pending payments and extra interest.
Here the salesman may try to convince you to pay some amount as down payment on your new lease. But this is not a good option. It may help in lowering your payments, but the money is lost forever and you may not be able to recover it contrary to purchasing the vehicle.
Which option should you choose?
It is important to analyze the lease-end options in order to take the right decision according to your situation. Once you have found the fair market value of the vehicle, you will know the cumulated equity on it. On the contrary, your vehicle’s market value may be lower than the residual value. For either of these situations, your decision won’t be the same.
In case of positive equity: If the equity on the vehicle is positive at the end of the lease i.e. the market values surpasses the residual value of the vehicle, it is advantageous to buy your vehicle. You could resell it after and make a profit.
You can also trade in the vehicle and use this equity on a new lease vehicle or purchase. In this car, the dealership buys the vehicle and you will save on the sales tax. Re-leasing or not exercising the buying option will not do you any favor and you will lose the profit if there is positive equity.
In case of negative equity: By negative equity, we mean that the cost of buying the leased vehicle is actually higher than what it is worth on the market. In that case, the best option would be to return the vehicle to its owner at the end of the term in order to avoid a loss.
If the lease is a close-end lease, then returning the vehicle will not be a problem. You will only have to pay for the excessive mileage charges and damages above and beyond wear-and-tear. You will not have to pay anything extra if you respected the agreement during your lease term.
In either of the two cases discussed above, the decision depends on your current situation.
