The latest research shows that over 95% of people are purchasing their vehicle with money they borrowed through the dealership or their own bank. Leasing a vehicle, instead of financing, is becoming more popular as customers can get the lower payments they need with shorter terms that make upgrading their car simple and easy. But what happens if your only a year or two into your lease and you want or need a different car; what are the options?
The biggest principal to remember is your car is not worth what you owe on the loan, it’s worth the market value. This can mean your vehicle is an asset (your car is paid off or the balance is less than market value) or there is negative equity (balance is higher than market value).
A lease contract states that only the leasee or the selling dealership is entitled to purchase the leased vehicle at the end of or during the lease. This makes selling the vehicle to a third party very difficult as the whole balance has to be paid, plus tax, before the car can be sold to the third party (and in most countries, tax is paid again by the new owner).
If you are less than halfway through your lease term, it is likely your vehicle has depreciated faster than you have been paying it off. Vehicles depreciate most in the first few years and less in later years and not all makes depreciate at the same rate. Honda vehicles (the company I work for) hold value the best and this is proven by the company winning the Automotive Lease Guide mainstream brand residual value award 8 times since 2004 and is the winner as recent as 2014 and 2013. To see a list of vehicles that retain the best value, visit the automotive lease guide website at www.alg.com.
There is a “magic point” where your lease balance matches the current market value. This is the time when you could return the car to the dealership you bought it from and not incur any penalties. Some factors that determine how fast you hit this magic point is mileage driven, accident history, color popularity, and condition of the vehicle.
The graph below shows how the trade value relates to the balance on the lease throughout the term. This is based on 20,000km/year and using data from CanadianBlackbook.com and Autotrader.ca. The legend below tells of the trade value in orange, in relation to each yearly term.
Some things we observe are:
So to conclude, you can always return or change a lease early if needed, but depending on the vehicle, there may be a balance owing. If a residual value winning Honda is on your list, give me a call, I’d be delighted to help.