If your car lease is up soon, you may be facing a decision. Should you turn the car in at the end of the contract or buy it outright?
Find Out What the Car Is Worth
One of the most important factors in deciding whether to buy or not, is current market value of the vehicle versus its residual value. The market value is what you could expect to pay for the car on the open market. The residual value is what the leasing company says the car is worth at the end of your lease.
Take these two steps:
- First, have your car appraised by a mechanic to estimate the market value of the car. Or, enter information about the make, model, options and condition at sites such as NADAguides.com.
- Then, compare the market value to the residual value of the vehicle. Your lease agreement should contain the residual value of the vehicle for each year of the lease.
If the market value is higher than the residual value, you may be getting a good deal by buying the car. For example, suppose the current market value is $9,000, but the residual value is $7,000. By purchasing the car for $7,000, you’re essentially getting a $2,000 discount.
However, if the market value is lower than the residual value, you might be better off handing the car in at the end of the lease. In this example, suppose the market value is $7,000 and the residual value is $9,000. If you purchase the car, you’d pay $9,000 for a vehicle that’s worth only $7,000.
Other financial factors also come into play. If you purchase the car, you may have to pay a purchase option fee. This should be spelled out in the lease. If you return the car, you may have to pay a disposition fee. Plus, depending on the condition, you may be charged wear-and-tear fees. If you drove the car more than the number of miles included in the lease, you may owe an excess mileage fee of $.10 to $.30 a mile.
That Leaves Three Reasons to Buy …
- The residual price is fair, and you still enjoy driving the car.
- The car is reliable and in good mechanical condition.
- The vehicle has more than the normal amount of dings and damage and/or excess miles, and you want to avoid paying those fees.
And Three Reasons Not To …
- The residual price is too high.
- You miss that new car smell or the car lacks the features you want.
- Your transportation needs have changed. Perhaps you need a larger vehicle for a growing family, or you prefer a smaller, more fuel-efficient vehicle.
Covering All Your Bases
Whether you decide to purchase the car at the end of the lease or turn it in and get something new, you will probably need financing. Navy Federal Credit Union offers competitive auto loan rates to qualified members. Learn more or apply online at Navy Federal.