The COVID-19 pandemic has taken its toll on many industries, and the car market is no exception. Whether you’re in the market for a new or used car, the current market is nothing short of wild. New car inventory has been scarce for the past 18 months, causing prices to soar. It’s not uncommon to pay thousands of dollars above the Manufacturer’s Suggested Retail Price (MSRP) just to get your hands on the car you want. Meanwhile, the used car market is even crazier. With new car sales stunted in recent years, late-model used cars are in high demand and selling for close to their original sales price.
But there’s one group who may come out on top during these wild times: car leaseholders. That’s right, leasing your car may actually turn out to be the smartest financial decision you ever made. This may come as a surprise to those who frown upon leasing due to its lack of building equity and inability to sell the car for cash or upgrade. However, the current car market means your leasing contract could have something extremely valuable: the buyout clause.
What is a Car Lease?
A car lease is essentially like renting a car for an extended period of time. Leases typically range from one to three years in length, and the lessee must pay fees, a down payment, and regular monthly payments. This option is appealing to those who enjoy having a new car, as the monthly payments are often lower than buying the car outright. At the end of the lease, the lessee can trade in the vehicle for the latest model.
Why Leasing a Car Could be a Smart Financial Decision
Most car leases come with a clause that gives the lessee the option to purchase the leased vehicle at the end of the lease term. The buyout price is typically included in the contract and is set based on valuations made when the contract was initiated, not when it ends. This means that with current car prices being so high, the buyout price in your lease contract could be much lower than the current market value of the vehicle.
For example, a late-model vehicle leased in 2019 or 2020 could potentially sell for the same price or even higher than it did when it was brand new. With the buyout price locked into pre-pandemic values, buying out your lease could save you thousands of dollars compared to the current market rate.
Options After Buying Out Your Lease
If you decide to buy out your leased vehicle, you have several options. The most affordable way to own a new (or new-to-you) vehicle right now is to simply keep it. The used car market is likely to remain hot for at least a few more years. Alternatively, you could buy the car and immediately sell it to someone else, potentially making a profit and recouping what you paid for the lease. However, this would leave you without a vehicle and in the market for another car during these inflated times. But if you were already planning on leasing another car, buying and selling your current lease could be a smart move. You would avoid turn-in or excess-mileage fees and potentially come out with a bit of profit.
