05.15.06
Time To Buy Your Car Lease?
Is it time to buy your car lease? Did you know 3.1 million car leases expire this year (2002)? If you are part of that group The Early Show’s personal financial adviser Ray Martin says now is the time to buy out your lease. They don’t want to talk about it, but car dealers are desperate to unload these vehicles, which means that great bargains abound. The alternative is to break your lease early and transfer the auto lease to another consumer seeking to take over the lease. You have options!The math of leasing a car is pretty simple. The carmaker guesses how much the car will be worth once the lease ends. This value is called the “residual” value. (You and I know it as the used car value; it’s the price that a leaser can purchase the vehicle for at the lease end, the “buy out price.”) Once the carmaker sets a residual price, the dealer who is leasing to the customer sets the monthly payment amount. This amount is based on the difference between the car’s selling price and its estimated residual value - the smaller the difference, the smaller the monthly payment.
Many customers love auto leasing because it allows them to drive a car they may not have been able to afford otherwise. As it turns out, however, leasing has not benefited automakers.
According to CNW Marketing Research, automakers lost an estimated $10 billion last year in the U.S. from lower-than expected residuals. Another group reports that last year, leasing companies lost an average of $2,914 on every car returned to them. That’s up from $2,550 in 2000.
Even if a car leasing company did not inflate the residual value, it is still being forced to take losses now because the value of used cars has dropped. Here is why: Auto makers managed to make leasing a popular option - leased cars comprised roughly 4 percent of sales in 1980 and over 30 percent by 1999. As leasers returned their vehicles to dealers, they created a glut of barely-used cars. This supply drove down the price. Thus, a 1998 Toyota 4-Runner whose buy-out price was set at $26,500 was only worth $23,000 last June.
The glut promises to continue as 3.1 million leases end this year, rental car companies pare back their fleets and drivers who binged on no-interest new car deals trade in their cars.
Also remember that when banks and finance companies take back a car at lease end, they typically sell it at a wholesale auction. At auction, dealers pay below retail prices, the companies incur a time delay in receiving the money and they must pay costly auction commissions. So, for many reasons, leasing companies would prefer that you buy out your lease or at least transfer the lease to someone else who is willing to take over the lease and buy it out.