If your car lease is expiring in the coming months, it MAY have a buyout purchase option. This means you have an option to buy the car at a previously set price. This price was set based upon the predicted residual value of the car at the end of the lease when you entered into the contract. Check your lease to see if yours has a buyout. If it does, you may want to consider executing the buyout for a number of reasons.
- New cars are in short supply mostly due to chip shortages. As with anything in short supply, they are more expensive than usual. By buying or leasing a new car now you would be locking in a high price.
- The prices of used cars are way up due to the new car shortage.
- Your current leased vehicle may have lower mileage due to curtailed driving in the pandemic.
- The buyout price may be well below the current market value of the vehicle.
- By buying the car you avoid the damage inspection and assessments for often minor issues when a leased car gets turned in.
If your car is worth considerably more than the buyout price it would make sense to consider exercising the buyout. But, remember the following:
- In most states, you will pay sales tax on the purchase price.
- If you the buy the vehicle and then sell it for a higher price, the gain will be subject to capital gains taxation.
- The finance/leasing company, not the dealer owns the car. They will be selling to you at a market loss, so they may try to dissuade you from exercising the option. For instance, the finance company may not be willing to finance a purchase of the vehicle. They also may work with the dealer to encourage you to roll the lease into a new vehicle purchase or lease by offering you a “discount”, but usually not as valuable as the purchase option.
If the vehicle has lower miles (often with a comprehensive or powertrain warranty still in effect), and a higher value than your purchase price, you may come out ahead by buying and driving it for a year or two while the new vehicle market works through the current shortage
The Bottom Line: Take advantage of mispriced options.
–Michael Ross, CFP®