Central Ohio drivers finding unexpected equity in expiring vehicle leases
Leasing is an attractive option for drivers looking to get into a low-mileage, newer vehicle with smaller monthly payments than afforded by buying.
But drivers who leased vehicles near the start of the pandemic are discovering an added bonus as those leases mature: equity.
The high value of leased vehicles is changing the calculation for drivers looking for their next set of wheels.
Business consultant Joe Lorenz usually buys his vehicles, but ended up leasing a 2019 Honda Civic.
“I think the original purchase on the car was taxes and everything included was like $24,500," Lorenz said.
As the lease was nearing the end of its term, Lorenz says he was offered a buyout arrangement. He said he could've bought the car for around $14,000—the residual value—but the dealer wanted to buy it back from him for around $19,000.
“[I] effectively got a $5,000 down payment," Lorenz said. "So it was quite a little surprise. Nice surprise."
Lorenz isn't the only lessee finding a nice little surprise at the end of their lease term.
“Typically consumers in the past, when you lease the car, it was kind of out of sight, out of mind when it came to turning it in," said Ivan Drury, Director of Insights at Edmunds.com. "Nobody ever thought 'Can I make money on this lease?' It just really wasn't something that came in to top of mind. It was just 'What’s my next car?'”
Right now, though, the average trade-in value of autos leased in 2020 is about $4,000 more than expected, Drury said. For cars leased in 2019 it was even higher: more than $7,000 above the predetermined residual value.
"Consumers were getting amazing deals. They were essentially driving for free. If you had a one-year-old car, you drove for free, you paid for the gas and the insurance, there was no maintenance in it to pay anything. It's only one year old, but many consumers, they end up getting the same price that they paid. The real question is what did you do next?" Drury said.
About a third of consumers today are doing what Joe Lorenz did, taking their (on average) $4,000 in trade equity to put it toward a new vehicle. That’s according to Tyson Jominy, Vice President of Data and Analytics at J.D. Power.
"In essence, they're flipping their own vehicle because what the dealer is offering them is higher than their contracted value. So they're taking that and they have equity in their lease, which is kind of rare," Jominy said.
Another third are buying their vehicle at the end of the lease and going home.
"And you get the final third of consumers who are just turning in their leases and behaving normally and going back into another lease and not even worrying about any of this, which is okay, but they're probably leaving a lot of money on the table," he said.
That second category of drivers who decide to keep their cars at the end of the lease has been growing since the pandemic. That could be in part due to the ongoing short supply of new vehicles to choose from.
Like many car dealerships, pickings remain slim at Kelly BMW on Morse Road in Columbus.
"I have about seven cars. Normally, I have 60 to 90 cars," said client advisor David Migliore.
Migliore said if a customer wants a specific model and trim level, they could be waiting six to eight weeks for it to arrive. If they want a new BMW today, they don't have many options.
"And that's hurt us more," Migliore said. "We don't like to tell people 'No.'"
Another factor that may be leading some to buy out their lease is that new leases remain unusually high.
Jominy said automakers have not been offering as many incentives to consumers because they haven't had to, which drives up the cost to lease.
"It's looking better. It's still not great. I mean, if you have a lease and you come back and you want to lease the same vehicle, be prepared for an increase of $150 to $200 or more per month in your payment. It's a very significant increase from before. So leasing is coming back. It is nowhere near where it was in 2019," he said.
The auto industry is slowly rebounding from pandemic-related shortages of microchips and other critical components, but experts predict it could be the end of the decade before the used car market recovers to pre-pandemic levels.