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Buying Tip: End of Your Lease?

What to do when it's time to turn in your ride.
by Eric Peters

What's that notice in the mail? According to the bank, there's just a month left of behind the wheel of your leased car. You've already started looking at slinky new models, but you're also thinking about keeping the machine already parked in your driveway.

It's time for a big decision: at the end of your vehicle's lease period, you can simply walk away and buy something else, buy the vehicle you are leasing, or lease a new vehicle.

Before you turn it in
If you do walk away, your obligations are over. The vehicle becomes the responsibility of the finance company that issued the lease. You'll have to go through a standard checklist, and you'll have to pay for any repairs that need to be made, plus any penalties for going over the mileage you agreed on in the first place.

You should be aware that any cosmetic or mechanical damage beyond normal wear and tear will typically cost you all or part of your deposit. You may even have to pay additional fees and penalties. Taking care of a leased car is more important than a rental car.

It's also important to give it a thorough check and cleaning before you turn it in. Clean it inside and out, removing stains, trash, dust and washing and waxing it, all to make it look as new as possible. If there is light to moderate damage, you will probably have to have it repaired, and may be able to fix it more inexpensively with your own body shop. Don't forget, the car will be inspected by the dealer; if it looks as though it's been treated roughly, the dealer's inspector will be even more careful to look for problems and cosmetic damage.

Before you lease
If you choose to buy the vehicle, or lease another one, there are a few things you should consider. How much are you really paying -- and how much does a lease actually cost you?

Before entering another lease -- or ever your first one - you'll need to do some homework. The best way to approach a lease is to determine which models hold their value well, whether you want to turn it in or buy it at the end of the term. If you have no intentions of buying it, you'll get a cheaper lease if you go with a vehicle with a good track record for holding its value. Likewise, if you want to buy it, you'll probably pay more at the end of the lease -- but the vehicle itself will also be worth more. (TCC partner Kelley Blue Book provides comprehensive vehicle values).

If you decide to lease, remember that it's in your interest to do so based upon the total price of the vehicle, just as if you were buying it. Negotiate a "sales price," then work out your monthly lease payments based upon that. Do not fixate on the monthly payment: it is the most common mistake made by people not familiar with lease contracts. Never tell the salesperson you are buying or leasing until after you've negotiated a transaction price; then figure your lease payments. Leasing contracts are very complex and it's easy to get sidetracked unless you really know the ins and outs -- and it's easy for salesmen to add in extra profit for themselves when you don't agree on a price before figuring out the terms.

Buying on residuals
If you intend to purchase the vehicle at the end of the term, you'll also have to do homework before you lease. You're looking for a reasonable "residual value" -- the expected market value of the car or truck at the end of the lease. Think of it as a balance due. Most leases issued today are "closed-end," meaning the residual value is not subject to change once agreed upon, irrespective of changes in the marketplace. So, if you agree to a certain residual value at the time of the lease, you won't be able to negotiate it in your favor at its end.

Before you agree to buy your leased vehicle, take another look at its average retail value. Electing to purchase the vehicle after a closed-end lease expires can be a boon or a bust, depending upon how much or little its actual market value has depreciated. A car or truck that has depreciated more than the expected residual value can be a terrible deal, since you will in effect be paying above market value for it.

On the other hand, if the vehicle has held its value well, your decision to purchase it can be very savvy as you will be paying under the going market rate for a vehicle of this type. And unlike buying a used car, you won't be buying a pig in a poke -- you're the "first owner," and know the car's history since the day it was driven off the lot.

Leasing generally makes better cars available for a lower price. But it's not without its caveats. As long as you've done the research, and turn in a clean, well-maintained vehicle, you'll see the benefits much more clearly.

© 2001 The Car Connection