Most people who lease a vehicle, do so because they don’t have the money to buy it and their credit is too low to secure a traditional loan. Leasing a vehicle allows consumers to drive off the lot the same day, usually without any money down, but often with high monthly payments — and they don’t actually own the car.
Option to Buy
As an alternative to traditional leasing, some dealerships offer leasing with the option to buy. Under this type of agreement, you lease a vehicle for a traditional period of time, such as 36 months, and then have the option to buy the car for its remaining residual value. Although dealerships often use their own algorithms to decide how much residual value is in the car, it’s typically the original lease price minus the depreciation rate, which is often cheaper than the standard market value.
For example, the suggested retail price of a 2014 Buick Enclave 2WD, according to Cars.com, is $39,830, at the time of publication. The residual value of the car after 36 months is 47 percent of the original retail price, which is $18,720. By paying the residual value price at the end of your loan, you can save a lot of money compared to buying a new vehicle.
To secure the best deal, you may need to negotiate with your dealership. You can often get a better deal, for example, by purchasing the vehicle before the end of your loan by paying the residual value in addition to any payments you have left on your lease. Offering to buy the vehicle early may persuade the dealership to knock off some of your remaining owed payments. However, waiting until the end of your lease may provide you with last-minute discounts that the dealership might not offer you if you make the first move.
Another consideration is that the dealership may be a little too optimistic when setting the residual value, which is often suggested by the manufacturer, and your vehicle may not be worth as much as the residual value by the end of your lease. If your vehicle is worth less than the residual value, a printed copy of a quote from a credible source, such as the Kelley Blue Book, may be enough to convince the dealership to lower the price.
The depreciation rate of a vehicle is the amount of value it loses each year due to normal wear and tear and market concerns. For example, a car will certainly depreciate after it reaches 60,000 miles, but it might depreciate even more over that time frame simply because it’s not a very popular model and the resale value is low. Each vehicle has its own specific depreciation rate compared to other vehicles, so it’s important to check the depreciation rate of that model before you sign a lease agreement.
A dealership is forced to guess what the depreciation value is going to be for that vehicle over the term of the lease and must honor whatever rate is specified in the lease agreement, even if the vehicle actually depreciates more than that. The leasing agency could also overvalue the depreciation. This would make the vehicle more valuable for you to buy at the end of the lease, as the leasing agency would be forced to sell it to you at a lower-than-market price if you arranged for that option at the beginning of the lease.
Residual vs. Retail Value
Because lease agreements may confuse consumers with multiple numbers and figures without a clear definition of what each value represents, it is important to know the difference between the residual value of a vehicle and the retail value. While the residual value is a representation of what your car is currently worth when depreciation rates and discounts are considered, the retail value is the amount that the manufacturer recommends that the dealership sell the car for. Typically, a lease would show the retail value of the car at the time that you signed the lease agreement.
However, taking the time to find the current retail value of the car from the manufacturer or a third-party group, such as the Kelley Blue Book, can show you whether buying the car would be a good deal compared to the residual value. If the residual value is lower than the retail value, for example, then it would be wise to buy the car. If the residual value is higher than the retail value, it would make more sense to simply buy the same model from a private seller. Typically, though, an end-of-lease buyout option is cheaper than buying the car elsewhere.