Q

Q

What happens at the end of a car lease?

A

A

You have three options once your car lease is up: Trade it in for another lease, return it and walk away, or buy the car you’ve been leasing. But when you choose to buy, you might wind up paying more than what the car is actually worth, so tread carefully.

Anna Swartz 1600

Anna Swartz

Published January 7, 2020

KEY TAKEAWAYS

  • Once your lease term is up, you must return the car to a dealership

  • The car will be inspected first, and you may be charged extra fees for excessive wear and tear

  • You can swap your current lease for a new one or return your vehicle and just walk away

  • There’s also the option to buy the car you’ve been leasing, but this isn’t always the most cost effective way to buy a car

Leasing a car is essentially like signing a contract for a long-term rental. You lease a car, truck or SUV from a dealership or through a bank. At the start of a lease, you make a down payment (also called a capital reduction), then you make monthly lease payments for the full length of the lease term in order to continue using the car. Ending a lease early can be very expensive, so be prepared to pay a hefty early cancellation fee if you take that route.

While you lease a car, you’re responsible for regular maintenance of the car, meaning oil changes and other regular upkeep. You’re also responsible for repairs, but because leased cars are usually new, they’re often still under manufacturer warranty which covers many repairs. It’s important to keep your leased vehicle in good condition, as you may be charged for any excess wear and tear, damage, or extra mileage.

Many car leases are for 24 or 36 months, and at the end of that term, you have a few different options:

  • You can trade in the vehicle for a new lease and start the process over again
  • You can return your car at the end of the lease and then walk away without a vehicle
  • You can buy the car you were leasing, (but look carefully at the terms of your lease and the condition of the car to determine whether this option makes financial sense)

Let’s take a look at some of the benefits and drawbacks of the three options you have at the end of a car lease.

In this article:

How to prepare for the end of a car lease

When you go to return your leased car, it’s typically a good idea to go back to the same dealership where you got your lease in the first place. If you can’t return it there, make arrangements to return your leased car at another one of the manufacturer's dealerships.

Before you return your car to the dealership, it will also undergo a lease inspection. If there is damage or excessive wear and use on the car, you will be charged extra fees. The inspector sent by the lessor will look for things like:

  • Dings or scratches on the vehicle’s exterior
  • Cracks in the windshield, moonroof or other windows
  • Excessive wear on the tires
  • Damage to the interior of the car, including rips, tears, stains or burns

Your lessor will make the arrangements for a lease inspection days or weeks before the date you’re set to drop off your car. It may be a good idea to get some small touch-ups and have your car washed before the inspection.

When the day comes to return your vehicle, don’t forget to bring everything that came with it, including all sets of keys, any original floor mats or accessories and the spare tire that came with the vehicle. And before you go to turn in your car, you’ll want to have a plan: Do you want to lease another vehicle? Or are you considering buying the car you’ve been leasing? Let’s examine the options.

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Do you get money back at the end of a car lease?

If you take excellent care of your leased car and put far fewer miles on it than you’re allotted in your lease agreement, it may be worth more than the residual value stated in your lease contract when you go to return it.

Say your residual value on your leased Camry was $12,500, and by the time your lease is up you’ve driven it so little and maintained it so well that it’s independently appraised at $13,200. That positive $700 difference is known as lease equity.

However, having lease equity doesn’t mean your dealership will cut you a check. If you’ve built up that equity by taking care of your car and then simply return it at the end of your lease term and walk away, you’re wasting that equity. The way to turn your lease equity into savings is by putting it towards either a new lease or the cost of buying your leased car.

If you’re trading in a leased car that’s worth more than it’s residual value, you should be able to “roll over” those savings into a new lease with the same lessor, or into the purchase cost of buying out the car. That’s how you “get money back” at the end of a car lease.

Leasing vs. buying a car

Most people are faced with two options when they need a new vehicle: either lease a brand new car or buy a new or used car with a car loan. No matter which route you choose, you’ll be making monthly payments on your car for the foreseeable future. But leasing vs. buying is a hard choice, let’s look at some of the pros and cons.

Pros of leasing a car

Leasing a car is a popular option because it comes with some perks, including:

  • You get to drive a brand new car with all the latest features
  • The monthly payments are lower than if you financed a car
  • Your car is always under warranty because it’s new

Cons of leasing a car

But leasing has drawbacks as well, and there are plenty of financial experts out there who advise drivers never to lease a car. The cons include:

  • It’s more expensive than buying in the long run
  • You have restrictions on your driving, like the number of miles you’re allotted each year
  • You don’t gain equity because you don’t actually own the car.

Pros of buying a car

Buying a cheap, reliable car outright with cash is almost always the best way to get a car from a financial standpoint, but that path is out of reach for most people. So buying a car with a car loan and paying it off over time is another common option. Like leasing, financing a car has some appealing benefits:

  • Your payments go towards owning the vehicle
  • Buying is usually cheaper than leasing in the long run
  • There are no restrictions on your driving

Cons of buying a car

But taking out a car loan has its negatives too, especially when compared with some of the benefits of leasing a car:

  • Monthly payments are higher than leasing
  • It will depreciate over the time you own it
  • You’ll wind up having to maintain an older car as opposed to leasing a newer one

Generally, buying a car makes more financial sense than leasing — especially buying a lightly used one. However, if you’re only planning on having a car for a short amount of time, or if you’re committed to always having the newest bells and whistles, then leasing might be right for you.

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What are your options at the end of a car lease?

As we’ve laid out, you have essentially three options when you reach the end of a car lease. You can start a new lease and drive home in a brand new car, you can end the lease and leave without a new one or you can choose to buy the car you were leasing. Every option has its pros and cons — let’s look at each of them in more depth.

Trading it in for a new lease

Once your lease is up, you can return to your dealership, turn in your leased car and sign a new lease for a brand new model. But the process isn’t always as simple as it sounds. For starters, when you return a car at the end of a lease you’ll also have to pay what’s called a disposition fee, which is a flat fee you agreed to pay at the end of the lease when you originally signed your contract.

The disposition fee is typically around $300 or $400, and it covers some of the costs for the dealership to turnaround and resell the car you were leasing. If you returned your leased car in poor condition or if you exceeded the mileage limits laid out in your lease terms, you may also be charged extra fees.

But if you’re planning on taking out another lease from the same dealership, you may be able to negotiate the fees somewhat. Many dealerships will waive the disposition fee for your old lease if you sign up for a new lease with them right away.

In fact, if your lease is coming to an end, you’ve probably started hearing from the dealership already. They may be offering special deals to get you to sign up for a new lease, like waiving the last couple months of your current lease and letting you switch from them early. Your lessor may even waive fees for wear and tear if you agree to sign on to a new lease with them.

That can make getting a new lease with the same lessor a lucrative offer — but you should still shop around before you sign on to a new lease.

Other manufacturers may also offer incentives to lease from them as a means of encouraging you to switch. Compare offers just like if you were shopping around for your first car — don’t get caught in a cycle of leasing car after car from the same dealership if there are better deals out there.

Returning a leased car and walking away

There are plenty of reasons you might not want to start another lease upon turning in your vehicle. Maybe it was a second car and now you’ve decided to downsize your household to one, or you want to buy a new car and plan on taking some time to shop around. But you’ll have to pay out all the fees that might be waived if you were signing onto a new lease right away.

Be prepared to pay the disposition fee in full, as well as any fees for excessive wear and tear for going over the mileage limits set in your lease. If you return your car after the termination date on your lease, you’ll also have to pay late fees. But once you’re all settled up, you’re free to walk away.

Buying your car at the end of the lease

A third option is to purchase the car you’ve been leasing. This is sometimes called leasing to own, and can be appealing for many drivers. Maybe you’ve come to really love the car you’re leasing, maybe it was your plan all along, or maybe you damaged the car or went over your allotted mileage and it now makes sense to buy the car rather than pay fees. However, leasing to own might not be the most cost-effective path to car ownership, and here’s why.

The value of your leased car by the end of the lease is actually laid out in your lease contract, it’s called the residual value. Say you leased a Toyota Camry with an MSRP of $23,000 at the start of the lease. Your lease contract states that you have an option to purchase the car at the end of the lease for $12,500, that means the residual value is $12,500.

By the time your 36-month lease is up, you might want to purchase the Camry — but it’s possible that the car’s actual value is less than the residual value outlined in your lease. In the event the leased Camry’s residual value is higher than its actual value, you’d be better off turning it in and buying a different one. However, if the actual value of the Camry is the same or more than the residual value, buying might be a smart idea, but there are still some costs to consider.

You have to pay sales tax and DMV fees at the start of the lease and when you buy, so if you end up leasing to buy, you’ll have to pay the same fees twice for the same car. Be sure to factor that in when you’re considering the cost of buying the car.

The dealer may offer you incentives if you buy your leased car and finance it with them, but you should still shop around before you decide to purchase — you may find a better deal on a different car.

Insurance Expert

Anna Swartz

Insurance Expert

Anna Swartz is a Managing Editor at Policygenius in New York City, and an expert in auto insurance. Previously, she was a senior staff writer at Mic, writing about news and culture. Her work has appeared in The Dodo, AOL, HuffPost, Salon and Heeb.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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