The end of your car lease can come before you know it, so it’s best to determine whether to buy out the car or return it to the dealer in the months before the lease period ends. Although you may love the car you’re leasing, it’s not always easy to decide whether to buy it once the lease is up. Depending on the vehicle’s condition, mileage and your contract with the dealership, choosing a lease buyout may or may not be a good investment.
Knowing your lease residual (and what this term means) will help you decide whether a lease buyout is right for you.
What is a lease and how does it work?
Although many Canadians prefer to purchase their cars, around one in five cars in Canada are leased. A vehicle lease is an agreement in which a dealership gives a customer temporary ownership of a car for a pre-determined amount of time and money. If a person fails to meet the conditions stated in the lease contract, they can face additional charges when the lease is up. People often choose to lease vehicles for business, personal use or as sort of a long-term test drive to help them find the perfect vehicle for their family.
When you lease a vehicle, you are responsible to maintain it and keep it within a set mileage allowance. Once your lease is up, you can choose to return the vehicle or purchase it from the dealership. Purchasing a leased vehicle is known as a lease buyout.
What is residual value?
The residual value of a leased vehicle is an estimate of how much the car is worth once the lease contract is up. The residual value helps determine what your monthly lease payment will be.
The lease residual is also the price you will pay if you decide to buy the vehicle once your lease is up. This is something you can negotiate as part of your lease contract.
How is lease residual calculated?
The lease residual is based on a certain percentage of the Manufacturer’s Suggested Retail Price (MSRP). For instance, if your leased vehicle has an MSRP of $30,000 and a residual lease value of 50% for a 36-month lease, the lease residual is $15,000.
Can I get out of a lease?
If you’re looking to get out of your lease before the arranged period is up, you have a few options:
Transfer your lease: Transferring a lease means handing over the lease agreement to another party. When you transfer a vehicle lease, the new party becomes responsible for the contract requirements, including the payments and vehicle’s condition.
Buy out your lease early: Most dealerships provide the option to buy out your lease early. To do so, you’ll have to pay the residual value of the vehicle and the outstanding balance on the lease. You may also be required to pay applicable taxes.
- Get a new car lease: If you have good credit, you may be able to end an existing lease and start a new one. However, dealerships will take the remaining balance of the lease, the residual value of the vehicle and taxes into consideration.
There are companies in Canada, like LeaseBusters, that are dedicated to transferring leases at affordable prices. There are also residual value car lease calculator tools available online.
What are the pros of buying out a lease?
People choose to buy out their vehicle lease for many reasons, including:
- Not only will you have a vehicle you’re already comfortable with, but you’ll have a dealership to return to with any concerns, including mechanical issues
- Buying your leased vehicle may cost less as you’ve already paid for the vehicle during the highest period of depreciation
What are the cons of buying out a lease?
Completing a lease buyout may not be in your best interest if:
- Your dealership requires a lease purchase fee (if included in the contract)
- A leased vehicle may end up costing more than buying a new model
As your end-of-lease period approaches, make sure you know the pros and cons of buying out your leased vehicle. If you’re unsure of your lease residual or the parameters of a buyout in your contract, set up an appointment with your dealer.
When it comes time to decide if you should buy out your lease, get an idea of the vehicle’s value with the free CARFAX Canada True Value range.