money Drivers find buying out car leases is the smartest financial move
Andrew Lokenauth has been getting brand new cars every three years for as long as he can remember, but he has never outright purchased a vehicle.
“I’ve always leased, and I’ve always gotten every penny out of my leases,” said the 35-year old financial analyst from Tampa, Florida.
Fast forward to 2022 and Lokenauth has decided that buying out the lease on his 2019 Honda Accord EX-L makes better financial sense than simply returning the car — for the first time ever.
That’s because the vehicle’s current market value is several thousand dollars higher than the residual value, which is a leasing company's educated prediction of what the vehicle would be worth in 2022.
“No one could have foreseen the impact the global pandemic and subsequent chip shortage would have on residual values, which were set to levels on par with predicted prices set in years prior,” said Ronald Montoya, senior consumer advice editor at edmunds.com. “Buyout prices are a good deal compared to the value of current inventory on dealer lots.”
“Unless you have a good reason to lease, it’s a good idea to buy the car outright,” he added.
“Some consumers have had as much as $10,000 in positive equity on their 2019 leases,” said industry expert, Zach Klempf, Founder and CEO of Selly Automotive, a a dealership software company recently acquired by Beekman Group. "This is the first time in history where non-collectible, common vehicles have significant positive equity.”
Why not just apply the equity toward a brand new car? The latest and greatest model?
“The equity people have in their lease may reduce the sting and help offset the costs of car ownership, but market pricing isn’t great right now,” said Matt Jones, industry education expert with TrueCar, an online car-buying platform.
Indeed.
New vehicle prices actually set a new record in July: $48,182, according to Kelley Blue Book, an automotive research firm. That’s up 12% from the prior-year period. And while prices have retreated some, according to the latest inflation readings, they are still high.
Not only is new vehicle affordability significantly worse than it was a few years ago, but interest rates are rising and incentives are virtually non-existent.
“Everyone’s paying sticker or above,” said Nathan MacAlpine, Founder of CarMate, an LA-based car broker that works with dozens of dealerships and independent lots throughout the US. “Things aren’t going to settle down until the end of 2023, beginning of 2024.”
Like many consumers, Lokenauth would rather wait things out. “My old Honda cost $249 a month for 36 months with $1,499 due at signing,” said Lokenauth. “If I wanted to lease the 2022 Honda Accord, it would cost me $320 a month with $2999 due at signing - that’s $70 more a month and $1500 more due at signing, which is a total of $4000 more.”
Lokenauth said he plans to keep his car for a few more years and then sell it on his own.
“I’ll either break even or pocket a few dollars,” said Lokenauth, who is in the process of refinancing his auto loan with a credit union at a 4.5% interest rate. “This is going to keep my payments in line with what I’m currently paying, and I can apply any savings toward my retirement.”
Personal finance journalist Vera Gibbons is a former staff writer for SmartMoney magazine and a former correspondent for Kiplinger's Personal Finance. Vera, who spent over a decade as an on-air financial analyst for MSNBC, currently serves as co-host of the weekly nonpolitical news podcast she founded, NoPo. She lives in Palm Beach, Florida.
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