Car Lease Ending Soon? Might Be Time to Buy
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Car buyers have had a tough few years. During the pandemic, chip shortages led to supply issues at the same time demand was skyrocketing. Now, Wall Street analysts are predicting a turnaround for 2023, with increased supply, slower demand and softening prices. But even if things aren’t as frenzied as they were, it’s still a tough time to buy a car.
Prices remain high, reaching a record $49,507 on average for a new car. Monthly payments have risen to an average of $728, also a record, thanks to rising interest rates.
Ideally, most drivers would hold off on buying a new car until prices drop, but there’s one group that can’t: those who lease their car and whose leases are soon to end. It will likely cost them hundreds more per month to get a new lease on the same car or to lease a newer version.
You can always ask the dealer to extend your current lease to see if the prices soften more or the rates drop a bit. But if your lease is up this year, maybe it’s time to stop renting and buy.
That’s because anyone looking to lease a car is likely to face high interest rates, with few benefits from dealers to offset them. In that case, it might make more sense to just go ahead and buy. That’s why, in the fourth quarter of 2022, only 26% of luxury car drivers leased their cars compared to 53% two years ago. If you can put more money down, you can end up with a monthly payment similar to a lease, but own the car outright.
If you like the car you are currently leasing, one of the best options right now is to buy it. When you first lease a car, the dealer will estimate the value of the car at the end of the lease term and give you the option to buy it for that value in the future.
If you bought the car a few years ago, this estimate, called the residual value, is probably much lower than what the car is worth today – so you’ll be able to buy your leased car for a discount. You can view your monthly lease statement to find the remaining value of your car.
Even if you don’t want to keep the car, it might be worth buying it anyway for the trade-in value. Prices for used cars have fallen from their recent historic levels, but they are still much higher than they were a few years ago. There are many websites that will estimate what you will get for trading in your current model; I like autotrader.com.
One catch with a hire purchase: it probably means the end of any service warranty. You can ask about extending them, but many expire after three years anyway.
If you want a large luxury car, large pickup truck or midsize or compact luxury SUV, you may be able to negotiate more, says Jessica Caldwell, executive director of insights at the auto website Edmunds.com. Average discounts for vehicles in those categories were larger than for other cars, such as midsize or large SUVs, Edmunds data show.
For example, the Volvo XC-60, a compact luxury SUV, had an average discount of $2,332 from the MSRP of $58,371, and the Ram 1500, a large truck, offered buyers an average discount of $2,367. At the top of the market, the Mercedes-Benz S-class, a large luxury car, had an average discount of almost $8,000 off its list price of $128,679.
During the pandemic, consumers who wanted to own their cars had no choice but to buy a used car given the non-existent supply of new cars. If you’re debating between the two right now, remember that financing rates are likely to be better with a new car, according to Sheldon Sandler, founder of a sales consulting firm. And security technology is always improving.
Ultimately, though, the best advice for any car buyer is to be flexible. Despite what Wall Street says, deals remain elusive.
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• Next year, resolve not to make money from your hobby: Erin Lowry
• The case for putting your bonus into a 401(k): Alexis Leondis
This column does not necessarily reflect the opinion of the editorial board or of Bloomberg LP and its owners.
Alexis Leondis is a Bloomberg Opinion columnist covering personal finance. Previously, she oversaw tax coverage for Bloomberg News.
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