How to Use the Equity at the End of Your Leased Car

Do You Have Equity?

Equity happens when your car’s lease purchase price (or residual value) is less than its trade-in value. When you originally negotiated your lease, the leasing company estimated what your car would be worth at the end of your lease term. This residual value is written into your lease contract: It’s the price you’ve agreed to pay if you want to buy the car at the end of the lease.

Many people who leased cars during the COVID-19 pandemic are finding they have positive equity as their leases end. Before you turn in your leased car and walk away, do these three things:

• Find your residual value. It’s listed in your lease contract. If you can’t find it, contact your leasing company and ask for it.
• Check your car’s trade-in value. Online platforms can provide an instant estimate based on your car’s year, make, model and mileage—or its VIN.
• Compare the numbers. If your car’s current value is greater than the residual price listed in your lease contract, you have equity.

Having equity means you have options. Here are five ways to leverage end-of-lease equity to cash out or lower the cost of your next car.

1. Buy the Car Yourself

If you love your car, consider buying it at the end of your lease term. You may be able to get financing from your dealer or leasing company, or you can shop for a loan at a bank or credit union. Think through the advantages and disadvantages of leasing vs. buying your car.

Pros

• You can keep your car. This is great news if you like your current vehicle and it’s in good condition.
• You’re getting a bargain. Having equity means your car is worth more than you’re paying for it.
• You’re saving money vs. buying a new car. With both new and used car pricing still at a premium, buying out your lease may be the best deal going.

Cons

• Your car may no longer suit you. Maybe you need a bigger car or want to try an electric vehicle.
• Financing can be tricky. Even with a low residual price, your loan payment could be higher than your monthly lease payment. If you extend your loan term to lower your payment, your car may be old by the time you pay it off.
• Your car will likely be out of warranty. This puts you on the hook for any needed repairs.

2. Buy the Car and Sell It

You don’t have to keep your car after buying it: You can sell it, possibly at a nice profit. As always, there are pros and cons:

Pros

• You could get top dollar by selling it yourself. You’ll have the freedom to shop your vehicle around to get the best price—or sell it as a private party and possibly get better-than-trade-in value.

Cons

• You may have to pay capital gains taxes on your profit. This could eat into any financial gain you get from the equity.
• You may owe sales tax as well. Check your state’s laws to learn more.
• You may need short-term financing to make the initial purchase. This will add to your costs and, again, could negate any gains you make.
• Selling a car can be hard work. If you’re not ready to take on advertising your car, dealing with potential buyers and everything else that comes with selling a car, this may not be the best option.

3. Use Equity as a Down Payment

Some dealers will apply your lease equity (or a portion of it) as a down payment on your next purchase or lease. If you’re inclined to buy or lease a new car from your current dealer and you have some equity, ask whether they can offer you a break on your next car.

Pros

• It’s easy. You’re simply rolling your equity into your next lease or purchase deal without doing any additional sales or purchase transactions.
• It’s worth mentioning, even if you only have a little equity. In a tight car-buying (and car-leasing) market, any bargaining incentive is a plus for you.

Cons

• You might get more money for your trade-in elsewhere. Though there’s no guarantee you’ll get more out of the deal, and doing so could take considerable effort, it could be worthwhile to consider.

4. Sell to a Third-Party Dealer

Another alternative is to try selling your car to a third-party dealer like Carvana or CarMax instead of returning it to the dealership or buying it yourself.

Pros

• Getting an online offer is quick and convenient. You can easily find out what price your car will fetch and compare offers from multiple companies.
• You don’t need to finance the deal. As long as your lease allows it, the third-party dealer purchases the car directly from the leasing company and pays you the difference. If your residual is $20,000 and the dealer offers you $25,000, for example, they’ll pay your lease company $20,000 and pay you $5,000.
• You have more options. You’re free to buy or lease your next car from the same third-party dealer or go elsewhere if you prefer.

Cons

• Some car manufacturers don’t allow sales to third-party dealers. Check with your leasing company for more information.

5. Sell to an Approved Dealer

If your leasing company doesn’t allow you to sell your car to a third-party dealer, they may give you the green light to sell it to an approved dealer, often one that sells the same type of car. For example, if you lease a Honda, you may be able to sell your leased car to a licensed Honda dealer. The key here is to get clarity on which dealers are approved and which ones aren’t.

Pros

• You can shop around. If your current dealer doesn’t offer what you consider to be a fair deal, you can try your luck at a different, same-branded dealership.
• You have more flexibility. This option may work when a sale to a third-party dealer is prohibited.

Cons

• You may have to do some legwork to find the best deal. If you don’t have the time or desire to do this, finding an approved seller may not be your best route to take.

The Bottom Line

Finding equity at the end of your car lease can put you in a good negotiating position, adding value whether you buy your car, sell it or use it as leverage on your next lease or purchase. The key is to factor in equity as your lease end approaches and take time to consider your options.

Whether you need a loan to buy your current car or want to lease or buy a new vehicle, good credit can help you secure the best rates and terms. You can avoid surprises by checking your credit report and credit score before you dive into the car-buying (or leasing) process. If necessary, take steps to put your credit in good order or try Experian Boost to give your score a potential lift by factoring on-time payments such as rent, utility and phone into your credit score.