What if my car is worth more than the residual value?

When your leased car's current market value exceeds its pre-determined residual value, you are in a favorable position known as having "positive equity" in the vehicle. This means the car is worth more than what the leasing company projected it would be worth at the end of your lease term.

Understanding Residual Value and Market Value

Before exploring your options, it's crucial to distinguish between these two key values:

• Residual Value: This is the projected value of your car at the end of the lease term, determined at the beginning of your lease agreement. It's essentially what the leasing company expects the car to be worth when you return it, and it forms the basis for your monthly lease payments.
• Market Value: This is what your car is currently worth on the open market. It's the price a dealer would pay for it, or what a private buyer would pay, based on factors like condition, mileage, features, and current demand.

When the market value is higher than the residual value, you have equity, which is the difference between the two.

Your Options When Your Leased Car Has Positive Equity

Having positive equity at the end of your lease term provides you with several advantageous options:

1. Trading In Your Leased Vehicle

This is a common and convenient option. If the current market value of your car is more than its residual value, you can trade it in to a dealership. The dealership essentially buys the vehicle from the leasing company at its residual value (your agreed-upon buyout price). The difference between the market value and the residual value is your equity, which can then be applied towards the purchase or lease of your next vehicle.

• How it works:
  • The dealership assesses your car's market value.
  • They pay off your lease buyout amount (residual value) to the leasing company.
  • The remaining amount (your equity) is used as a down payment or credit towards your new car.
• Pros: Convenience, immediate application of equity, potential sales tax savings on the new purchase (as you only pay tax on the difference between the new car's price and your trade-in equity in some states).
• Cons: You might not get the absolute highest value compared to selling it privately.

2. Buying Out Your Lease and Selling It Privately

If you want to maximize your profit, you can choose to purchase the car yourself at the residual value (plus any associated fees), and then sell it to a private party. This allows you to capture the full market value of the car, potentially yielding a larger profit than a trade-in.

• How it works:
  • You inform your leasing company of your intent to buy out the lease.
  • You pay the residual value (plus any purchase option fees) to own the car.
  • You then market and sell the car yourself to a private buyer.
• Pros: Potential for the highest return on your equity.
• Cons: Requires more effort and time (advertising, showing the car, handling paperwork), you may incur sales tax on the buyout, and you'll need to secure financing for the buyout if you don't have the cash readily available.

3. Buying Out Your Lease and Keeping the Car

If you love your leased vehicle and its market value significantly exceeds its residual value, buying it out can be an excellent deal. You'd be purchasing a car you're familiar with, at a price potentially well below its current market worth, effectively securing instant equity.

• How it works:
  • You exercise your purchase option by paying the residual value (plus any fees) to the leasing company.
  • The car becomes yours, and you can continue to drive it.
• Pros: You get to keep a car you know and like, potentially at a bargain price, and avoid the hassle of finding a new vehicle.
• Cons: You will be responsible for sales tax on the buyout and all future maintenance.

The Critical First Step: Know Your Residual Value

No matter which option you choose, the very first step is to know the residual value of the car. This figure is clearly stated in your original lease agreement. You can also contact your leasing company directly to confirm your exact buyout price and any associated fees. Understanding this crucial number empowers you to make an informed decision and calculate your potential equity.

Factors Influencing Market Value

Several factors can cause your car's market value to appreciate above its residual value, including:

• Low Mileage: Less mileage than originally estimated in the lease.
• Excellent Condition: Well-maintained interior and exterior with no significant damage.
• High Demand: Specific make and models experiencing unexpected popularity.
• Market Fluctuations: Overall used car market appreciation, as seen during periods of new car shortages.

Comparing Your Options

Here's a quick comparison of the primary options when you have positive equity:

Ultimately, having your car's market value exceed its residual value is a financially advantageous situation, offering flexibility and potential savings or profit at the end of your lease.