By John Corron, CFP®, Wealth Advisor –
If you signed a car lease in 2019, 2020 or the early part of 2021, there is a good chance that you have a decent amount of equity in your lease contract. It is generally the case where property values and home equity has grown steadily for many years, but significant equity in car leases is a new phenomenon – a result of current supply shortages in the vehicle market.
Car Equity Explained
What is car lease equity? Simply put, it is the current market value of your leased vehicle minus the stated residual value in your lease contract. Because new and used cars are in short supply, current market prices are generally significantly higher than they were pre-COVID. In fact, new and used car price increases have been a major component used the in the calculation of the U.S. (and global) inflation rises over the last 12-18 months.
So what does this mean for you if you are in the enviable position of being in a lease that is nearing maturity? It means you have options:
- Buy It: Perhaps for the first time in a long time, buying your vehicle at the end of its lease term may make good sense. Buying at your stated contract residual value could mean significant savings for you, so it’s worth considering even if you might prefer a trade-in for something new.
- Flip It: You could use the lease equity to apply it to your next lease or possibly the purchase of a new vehicle. A similar vehicle now costs more to lease or buy, so the gain to you is less than cashing out and repurposing those funds. If you don’t have an extra car and need to roll into something new, maybe your options for leaving some of your lease equity in your pocket are limited.
- Cash It Out: If you have an extra vehicle or don’t mind downgrading and could use some cash, dealers and other vehicle sellers are offering decent amounts of cash to buy out leases. Less of the equity value would accrue to you in these deals because there are costs for the buyers to cover and they still need to turn around and sell the vehicle at a profit. You can then use that extra cash to pay down debt or invest.
A Historic Dynamic
The cool thing about this new dynamic is that it is historically rare and may only last for a short time longer (think maybe 1-2 years) while current leases mature. New leases are already reflecting the higher current prices of today’s scarce vehicle supply.
Currently, lessees have options and potential equity value that they generally did not have in the past. It’s worth thinking through the right combination of wants and needs in the months and weeks leading up to lease maturity.
If you’re a lessee, or know someone who is, and could use some help sorting through the best option for you, get in touch with a financial planner or advisor. They should be able to add some numbers to and help simplify your decision. You may also end up with some extra points to use in negotiating your final deal when your lease is up.