Should You Buy Your Leased Car?

You leased your car during the pandemic-or prior to-, and the lease on the vehicle is now up. You usually have a few options: return the vehicle, buy it out or extend your lease.

Let’s take a look at what you can do, based on the current conditions. The pandemic has definitely thrown a curve ball in the car market.

Lease Basics

As a reminder, a car lease is when a dealership lets you use a brand new vehicle for a set period of time, for a set monthly payment. You’re usually responsible for part, if not all, of the maintenance.

Most dealerships also impose limits on the number of kilometers you can drive, as well as insurance requirements. All the conditions are spelled-out in the lease agreement. Read it carefully before signing!

The dealership retains ownership of the car. At the end of the lease, an inspection and the applicable fee are also very common, even if you buy the car. be prepared to shell-out a few hundreds.

You could be charged “administrative” fees or buy-out fees. You can negotiate these/have them waived before signing the lease

Now that we have that out of the way, let’s dig-in further.

Residual Value vs. Market Value

You’ll always be given the option to buy your car at the end of the lease. The lump-sum amount that you’ll need to pay is called the residual value. It’s a percentage of the Manufacturer’s Suggested Retail Price or MSRP.

Compare this amount to your car’s actual market value. In Canada, you can check the Canadian Black Book or Kelley Blue Book to get a free estimate of your car’s market value. If the market value is higher than the residual value, it may be worth buying your vehicle.

During Covid, car prices went up due to a shortage of cars and supply chain issues. The market value of my 2013 Mazda 2 went up by $ 3 000. It hasn’t bulged that much since.

Mileage

Dealerships set a cap on the number of kilometers you can drive, usually 20 000 kms per year. Let’s say you have a 3-year lease. You would have an allotment of 60 000 kms. If you only drove 45 000 kms during your lease, it can give you an advantage as mileage impacts the market value of a vehicle.

Overall Condition

The overall condition of your vehicle also impacts its market value. Under a lease, you are responsible for the excessive wear and tear of the vehicle. This is when things can get sketchy. Dealerships are notorious for charging excessive amounts for minor repairs.

If the vehicle needs some fixes, handle them before going back to the dealership. You can also buy the vehicle and handle the repairs on your own time and dime.

Recap’

To answer the above question, you should consider buying your car at the end of its lease if:

  • The market value is higher than residual value
  • The mileage is lower than anticipated
  • The vehicle is in good or great condition, i.e. normal wear-and-tear, only needs minor fixes
  • You no longer want a car payment: that’s a pretty big one too!
  • You like your vehicle

If you’re not ticking most of the above list, then you should return the car and make alternate arrangements. Same applies if you were into a major crash or a series of fender-benders. These also negatively impact the market value of the vehicle.

Current Inventory is Still Overpriced

If you’re planning to buy a car this year, you’ll still be in for a sticker shock. It’s definitely something you need to factor-in.

There is still a strong demand combined with a galloping inflation, interest rate hikes and lingering supply chain issues, primarily of semi-conductors. All pushing prices up, whether on new cars or used ones.

The current used car inventory was bought during the pandemic, at much higher rates than it should have been.

Dealerships offer no real incentives at the moment.

Don’t Wait Until The Last Minute

The dealership -and sometimes the leasing agent-will contact you 2 to 3 months before your lease is up.

I’d suggest making a decision long before that. Figure-out what you want to do 12 months before. It will give you ample time to do your research and save money, whatever you decide. Right now, it can take up to 12 months to buy certain models.

That’s what I did. I ticked all the items on the above list. The most important being I didn’t want the monthly car payment anymore. I saved money for a little bit over a year. It was 5 years ago, and I don’t regret my decision.

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