In recent years, we’ve all become very familiar with the concept of the car lease. By spreading the car’s cost and allowing for a return or upgrade model, drivers can now affordably get their hands on the latest models and even upgrade considerably from what they could buy outright or with a fixed-term auto loan.
As times have become more and more challenging financially, some are looking to escape their leases to relieve their monthly financial burden. It can be tricky, but some lessees have found some brilliant ways to turn a car lease into car profit.
Returning the Vehicle
The key moment with a lease vehicle is when the day comes to return it. Typically, you have a few options as your current lease is expiring:
- Return the car and move on with your life
- Return the car but trade-in for another model and a new contract
- Buy the car outright by paying the remaining balance on the lease.
The second option appeals to most drivers because it allows them to keep driving the latest model. It is certainly the ideal outcome under normal circumstances, but fortunes can change rapidly, as we saw in 2020.
How, then, have some car lessees been able to sell their lease cars for profit? Isn’t a car always a depreciating asset? We explain more below.
Selling a Lease Car for Profit
The key that makes this idea work is the fact that used vehicle sales have been growing fast, even in the troubled times of 2020. Quartz published data based on the US Census and the Consumer Price Index in October 2020 that showed in the third quarter of 2020, used cars skyrocketed to 14 percent greater value than back in January 2017.
On top of that, the pressure created by the COVID-19 pandemic has resulted in a car shortage, which has pushed the residual value (see below Step 1) of leased cars under their regular market value. Put these two factors together, and you can now potentially sell lease cars at a profit.
Below is a step-by-step guide on how to achieve this yourself:
Get the Residual Value
The first key number that you have to obtain and comprehend is your leased vehicle’s residual value. This refers to how much the car will be worth upon the expiration of the lease agreement. The residual rate is usually given as a percentage and should be stipulated in your lease agreement. It may also be written as a fixed amount that tells you how much you’d have to pay at the end of your contract if you wanted to buy the vehicle outright.
As an example, if the given residual value of your car was 50 percent of your agreed-upon price when you signed the contract, then you can calculate the figure yourself quite easily. Let’s say you’re agreed-upon price was $28,000. That would make the contracted residual value $14,000.
Find out the Market Value
Once you have the residual value, you need to compare it to the market value. This part can feel tricky because there could be a thousand people selling the same model car as yours, all at different prices. To get a good handle on market value, it’s best to consult a pricing guide like the Kelley Blue Book or Edmunds. Both of these are regarded as reliable, accurate, and fair reflections of used-car market value.
The discovery you want to make is that the market value number is higher than your lease residual value. The difference between the two is the maximum profit you can make from buying out your lease and then selling the car yourself at market value either privately or to a dealership.
Factor in Additional Payments
The first two steps gave you a margin in which to work, so the next step is to see what will eat into that margin. One such thing is additional fees from the dealership that you may have to endure when buying out the lease. One common one you might see is known as the “disposition fee.” They will also factor in any remaining payments if you’re buying out early.
You can likely find these in your lease agreement. They should be spelled out clearly, or at least the method for calculating them should be spelled out. Alternatively, you can call the dealership and inquire how much would be charged if you were to buy out your lease tomorrow.
Make the Deal
This is the most critical step, and there is more than one way to get it done.
The easiest ways to sell your lease car and turn it into your cash are to sell it back to the dealership or sell it privately.
First let’s look at selling it back directly to the dealership.
Sell Back to the Dealership
If the residual value is significantly lower than the market value, then the ball is in your court. In general, dealerships are struggling to get enough high-quality used cars to sell and meet growing demand from consumers. In other words, you have something they want.
Since the dealership is also the party with whom you signed the lease, it does make the process a little simpler. However, there is also a greater chance that your profit margin will be reduced because first, the dealership has its own margins in which it has to operate, and second because there could be additional fees like those we mentioned in step 3.
The good news is that you are in a strong negotiating position. If you know the numbers, then you are aware of how much wiggle room you have. Stay within those limits, and you’ll end up with a profit regardless.
Sell the Lease Car Privately
The best way to ensure a greater margin is to sell privately. Corporate margins may constrain dealerships, but private buyers are not. You, therefore, can maximize your chances of a healthy profit. There is one sore point in going down this road: you have to buy out the lease first.
There’s no problem here if you already have the cash on hand to use to buy out the lease. Once you pay the money to the dealership, they’ll hand over the title to you, which you can then use to sell the car to your buyer. It’s a good idea to have a buyer (and possibly a backup buyer) lined up at an agreed price before you go ahead and buy out your lease.
Alternative Paths for Car Lessees
Many may be surprised to learn it’s possible to turn a profit on a car like this, and most of the time, they would be right. The special circumstances created by the COVID-19 pandemic and surging demand for used cars have created a favorable market environment for lessees.
Of course, there are alternative paths if you want to get out of a car lease without losing too much money. You could transfer your lease to another party through a platform like leastrader.com. You could also return the car to the dealership and work out terms on a new lease, perhaps more affordable or more suitable to a new situation.
Remember that your car lease is not for life. You don’t have to feel trapped or obliged to continue if circumstances have changed for you. In the current climate, dealerships are more flexible than ever and are typically very willing to work out a plan that works for you. If you can make some money along the way, we say, ‘why not?’