Many people have leases coming to termination this time of year. I have heard from many of my listeners recently wanting advice on what to get for their next vehicle. Several times lately, when I ask them what they plan to do with their current vehicle, the reply was something to the effect of “just turning it in and walking away.” None of them had done any homework to see if they actually had equity.
In fact, for years, people who leased over and over just turned their leased vehicles in without even checking the value. Everybody in the industry knew there was no need; the value was ALWAYS less than the residual value with rare exception, but all that has changed now and I am seeing more and more people who have money left over and don’t realize it.
Two factors have contributed to this new phenomenon of lease-end equity. First, vehicles coming off lease today had realistic residual values when the lease was started. For years, many manufacturers inflated residual values to make payments lower, but that came back to bite them and they stopped this practice. Secondly, the sky-high used car values I have been telling you about are aiding in helping people pocket cash at the end of their lease.
Looking to the future, I see the used car shortage and high values to continue for at least another year. Lower new vehicle sales mean fewer trade-ins in the future. This creates a shortage of used cars and makes values remain at peaks. Most of the vehicles being traded today were bought in the 2008 to 2009 timeframe, both low volume years for the auto industry.
One thing is for sure, lease companies today want you to turn in your vehicle at the end of your lease. There is nothing they would love more than to take it to auction and pocket your equity. This is a reversal of epic proportion. Just a year or so ago, they were enticing you to purchase your lease car with low interest rates and other offers. At that time, they did not want your lease car back, knowing they had a deep loss coming.
In addition to looking closely at your current lease if you are in one, bear in mind that if there is equity, that money is yours. You can even take it in cash to help with some other bills you might have, or use it toward your next lease or purchase.
I would tell you too that if you are in the market, and are not a high mileage driver, you should look hard at leasing in this climate. After hitting a six-year low in 2009, leasing has gained momentum each year since then. Right now, leasing stands at around 30% of the new vehicles sold in 2011.
Just about all the automakers have lease specials right now that are intended to lower lease payments. Even the domestic car companies are getting back into it. These incentives will give you a lower lease payment or allow you to get a nicer car than previously thought. Plus you only pay for the best part of the vehicle; its first three years and you avoid a lot of the maintenance costs you have to absorb when you buy.
With the exception of people who drive more than 15,000 miles per year, I think smart money today is on leasing.