Ending your car rental contract is tricky, but can still pay off
That car you rented three years ago has probably become a cash cow. But deciding what to do with that equity — and what to drive next — has become confusing.
Before the car market was turned upside down by the pandemic, microchip shortages and supply chain disruptions, most people simply returned their rental cars. But now that most leased vehicles are worth thousands of dollars more than the pre-determined price in the lease agreement, a savvy consumer might want to take advantage of this bonus.
And this is where things get complicated.
“Removing equity at the end of the lease is more difficult than simply returning it,” says Scot Hall, executive vice president of operations at Swapalease, which connects lessees with car buyers looking to take over a lease. .
There’s a new wrinkle
“Captive” auto lenders, the financing arms of manufacturers who typically handle leases, want these first-time leased cars — usually well-maintained with low miles — returned to their own dealerships to be sold as used cars. certified, says Hall.
To encourage this, many lenders will only honor the residual value of the contract for the owner. This means that someone who wants to sell their car online at Carvana or CarMax or use it as a trade-in for another brand of vehicle has to go through several steps and then buy a ride to replace the old one.
It’s hard too. Dealership lots are often nearly empty, prices for all vehicles have skyrocketed, and incentives like low-rate financing — the kind that made leasing attractive in the first place — have disappeared.
“Consumers find themselves in a confusing situation,” says Ivan Drury, senior information manager for Edmunds.com, an online resource for automotive inventories and dealer reviews. He notes that leasing’s popularity has taken a hit, dropping from 29% of all transactions in February 2021 to just 21% in February 2022.
So what does this mean for you? Well, you will have to proceed with caution if you wish to capture the equity accumulated in your leased car.
How much equity do you have?
First, find your buyout price by logging into your online account or calling your lender, or use a lease buyout calculator to estimate. This is usually your residual value plus any remaining payments.
Next, you will need to find the current market value of your car. You can estimate using many online pricing guides such as Edmunds.com or Kelley Blue Book. Hall recommends researching the trade-in price because that’s the amount most dealerships will give you. Or, you can get cash offers to sell your car online.
Then subtract the buyout price from the current trade-in value or bid and presto, that’s your equity.
Edmunds.com estimates net worth to be around $7,000, on average, for leased 2019 model year vehicles.
What are your options?
“Decide what you want to do next, then go back,” advises Hall.
Here are your options as you approach the end of your lease:
- Return the car to the leasing company for another vehicle from the same manufacturer.
- Turn your car over to the leasing company, then lease or buy a different brand of vehicle.
- Return your rental car, pay the fee and drive away.
- Extend your lease on a monthly basis.
- Buy your car and keep driving it.
- Buy your car and resell it to a private individual or to a dealership.
A key factor in your decision may be sales taxes. If you buy your car, even if you plan to resell it immediately, you will have to pay sales taxes applicable to your city, county and state. And when you trade in your car, many states only tax you on the difference between its value and the value of the new car.
These factors can dent or eat away at your capital. A dealership’s offer for your car may be lower than what you might get elsewhere, but taxes may make it the smarter choice financially.
All of these options have advantages, but the first two can be a bit more complex.
Return your car for another of the same brand
Ending your current lease and then leasing or buying the same brand of vehicle can help you in several ways:
- Trading the vehicle in rather than simply handing it in can wipe out rental disposal fees and penalties for exceeding authorized miles and excessive wear and tear.
- Trading in your rental car also typically reduces sales tax on the new car.
- Your capital can be used as a down payment on a new or used car or to cover the start-up costs of a new lease.
Hand in your car, then buy or lease another brand
Equity mining is more difficult when you want a new car from a different brand.
If your current lender won’t allow a third party to buy out the lease, you’ll have to do it yourself. That means finding a lease buyout loan, paying sales taxes and fees, then registering and title the car in your own name. Then you are free to trade in or sell the car as you wish.
A possible workaround is to find a dealership group that sells both the brand you own and the brand you want, suggests Hall. One arm of the dealer group might buy the car back, and the other arm might get you into a new car. You wouldn’t have to pay sales tax on the buy-back, because the dealer would buy the car, not you.
Should we act or remain seated?
Although “equities” may seem like free money to take, it is not. The only way to capture all that gain is to buy out the lease, sell the vehicle, and not buy another.
Leveraging equity in another car could be a financial washout.
Sure, you’re getting money you didn’t expect from your old vehicle, but rising sticker prices, sales taxes, and dealer-mandated extras can easily eat it up. Many of the rental incentives that helped lower your monthly payments are now gone, says Drury.
“Reevaluate before jumping straight into another lease,” advises Drury.
If you love your current rental car, perhaps the smartest move is to simply buy it – at what is now a bargain price – and drive it for as long as possible.
If you need a new car, the equity in your lease can be a buffer against sticker shock.
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Philip Reed writes for NerdWallet. Email: [email protected] Twitter: @AutoReed.
The article Ending Your Car Rental Is Tricky, But Can Still Pay Off originally appeared on NerdWallet.