The first question was tough enough: lease or buy?
Soon, for millions of drivers who opted for leasing, it will be decision time all over again.
The new question: What to do with the used leased car?
It’s not as easy as it sounds. Like the original issue, this one requires some analysis. The payoff: a possible windfall of thousands of dollars or, more likely, a savings of a few hundred from knowing how to play the game.
Leases are expiring on more than 2.5 million U.S. vehicles this year and next, says Art Spinella, vice president of CNW Marketing Research, a Bandon, Ore., company that tracks the leasing trade.
But many leaseholders will settle for less than they should.
Too many, Spinella says, just drive in, turn in the keys to the old car, and drive away in a new model. They miss a chance to pad their pocketbook.
“If you’ve got a Blazer, bring it in a month early,” says Spinella. “Your dealer may already have someone looking for one”-and you could walk away with a profit.
Leased cars offer the chance for financial gains when their market value-what they’d fetch on the street-is greater than their “residual value.” The residual value is estimated when you sign a leasing contract. It is what the car is projected to be worth when the lease expires. It’s also the price drivers must pay to buy the car when the lease ends.
Setting a residual value is an inexact science. Drivers can benefit if the number proves to be too low. But more often, the projection tops the street price.
“Most of the time the residual value is going to be higher than the vehicle’s market value,” says Mike Hernandez, president of D&M Leasing in Arlington, Texas. “That’s when you can enjoy one of the biggest advantages of a lease. You can just walk away.”
If your car lease is set to expire soon, Spinella, Hernandez and others suggest this approach: Evaluate buying the car and reselling it yourself.
To make money on the deal, your car must be worth more than the residual value on the lease expiration date, and you have to find a buyer.
Instead of turning in the vehicle and walking away, buy it and then sell it outright or trade it in on the next purchase.
Residual values can be wrong, because lenders who finance the leases are forecasting what the car will be worth two, three, four years down the road, Spinella says.
Some cars get “hot” during that time, and their values, while declining, remain higher than projections. Other vehicles fade in popularity, and their worth declines below the residual levels.
Evaluate your situation carefully. The gain may be so small that it’s not worth the hassle. Or it may justify plenty of time and energy.
Consider a best-case scenario: a driver who signed a two-year lease on a new Chevy or GMC Suburban in fall 1992.
The Suburban’s residual value was projected to be $15,000 in fall 1994, says Doug Aiken, the Santa Barbara, Calif., publisher of Automotive Lease Guide, a trade book.
But the used Suburban, if it’s in good shape, has a wholesale market value of $18,000, Aiken says.
It would be relatively easy to earn a $3,000 profit by buying the Suburban for its residual value and reselling it-either to an individual or a car dealer.
On the other side of the equation is a new Mercedes-Benz 300SE, leased for two years in fall 1992. Its residual value is $50,000, Aiken says. But it’s selling for $45,000.
In this case, economics suggest turning the car in. You should be able to buy a similar used model for $5,000 less.
But economics don’t always rule. You may believe your Mercedes is worth a premium, because it’s been pampered and serviced well. You know the car, and hunting for a comparable car may be too uncertain and time-consuming.
Evaluating such fine points and setting a course of action should begin at least a month before the lease expires, says Mac Churchill, president and owner of Mac Churchill Auto Group in Ft. Worth.
To put a value on your current leased car, consider several sources.
Used-car pricing books, such as the Kelley Blue Book and the National Auto Dealers Association Used Car Price Book, offer guidelines and general price trends. The books are available in many libraries, bookstores, lenders’ offices and auto dealerships.
Check classified ads in the newspapers, and ask a couple of dealers for their best offers.
If there’s a question about the residual value of your used lease car or any other model, check listings in the Automotive Lease Guide. For the latest copy of the bimonthly guide ($12.50), call 813-536-8093.
If you’re leasing a “hot seller,” you have several options. In addition to buying the car at its residual value and selling it yourself, you may be able to strike a good deal with the lessor.
You may be able to trade out of the lease early without additional costs, says David Blassingame, vice president of Autoflex Leasing, a leasing firm.
If you have a popular car, use that leverage to negotiate a reduction in add-on costs. Charges for excess mileage or wear and tear can run into the thousands of dollars.
Recently, consumer advocate Ralph Nader warned that leasing companies were gouging drivers, charging them hundreds to thousands of dollars more than necessary.
Nader and officials from nearly two dozen states called for leasing reforms, including greater disclosure of prices and fees. They’ve created a detailed guide, called the Reality Checklist, to help consumers determine the true costs of leasing.
For a copy, send a $1 check or money order to Reality Checklist, Box 7648, Atlanta, Ga. 30357-0648.
