The end of your car lease could mark the start of your new car-driving adventures đźš—. You have other avenues to consider than just returning the car.
You could:
- Buy out your car lease.
- Trade in the car for a new lease.
- Transfer the lease.
- Extend the car lease.
Or just return the car.
To arrive at the best decision, you’ll have to answer these questions:
- What is the residual value of your car?
- What is the market value of your car?
- What are the current interest rates on car loans?
- How much would this car cost in the used car market?
- Will I be racking up the miles in the next 365 days?
As you’ll see in the article, the answers to these questions will guide you to a decision that aligns with your needs and meets your budget.
Choosing the right option will help you save money, improve your credit score, and keep you in the driver’s seat for the next few years.
What Are Your Options When the Car Lease Ends?
The car dealership or leasing company will reach out to you six months before your car lease expires đź“ł. They want to know your next move.
Your “next move” isn’t a decision you should rush into. Tell them you’ll weigh your options, then use the next six months to do research… which we’ve already done for you!
Here are the five options to consider when your car lease ends.
Which one’s for you?
1. Extend Your Lease
Some dealerships will offer an option to extend your lease.
Extending the car lease is a good option if:
- You’re not ready to buy a car yet.
- The monthly amortization of a car loan costs more than the monthly payments of a leased vehicle.
- The lease payments fit your monthly budget.
- You don’t expect to rack up more mileage over the next few months.
- You’re happy with the current lease arrangement.
If you’re leaning towards this option, ask the leasing company the following questions:
- Do they offer shorter-term lease agreements? Car lease agreements usually have a contract duration of two to four months. However, with a lease extension, the leasing company might agree to a shorter term such as monthly, six months, or one year.
- Can they increase the mileage limit? If you’re currently limited to 10,000 miles, find out if the leasing company can increase the limit to 15,000 miles.
đź’ˇNote: Car lease payments are reported to the credit bureaus.
Extending your car lease is a smart move if you’ve never missed a payment. Your consistent payments can help boost your credit score and increase your chances of getting approved for a car loan.
2. Car Lease Buyout
The residual value or buyout price of your car is its estimated worth at the end of the lease contract. It’s the price of the leased car if you decide to buy it. The dealer determines the car’s residual value and includes it in your lease agreement.
The market value represents the estimated current worth of your car in the used car marketplace. KelleyBlueBrook, Edmunds, and Carvana are websites that offer free estimates of your car’s market value.
If the residual value of your car is lower than its market value, buying out your car lease is a good idea.Â
Once you own the car, you have the option of selling it in the used car market for profit.
Buying a car you have leased is a good idea because you are already familiar with it. You have an idea of how it runs, its issues, and its history of repairs and maintenance.
If you buy someone else’s used car, it might look clean, shiny, and have a “new car smell”… but you don’t know where it’s been and how it was maintained.
3. Trade-in for a New Car Lease
If the residual value of your leased car is higher than its market value, negotiate a trade-in with the car dealership.
Use its equity to purchase or lease a new car.
Remember, a car is a depreciating asset.
As soon as the car leaves the showroom, it begins to depreciate due to wear and tear. Opting for a trade-in allows you to enjoy a new car every few years.
You also have to consider inflation.
If inflation continues to rise, the Federal Reserve will hike its benchmark rate to slow down consumer spending. However, the increase in the benchmark rate will push up interest rates on car loans.
Even those with impressive credit scores won’t be spared from increased loan rates.
đź’ˇPro Tip: When inflation is rising, leasing becomes a more viable option than buying a car.
4. Transfer the Lease
Some leasing companies may permit you to transfer the remaining portion of your lease to another person. Verify if the leasing company’s lease transfer policy has any restrictions. If there are limitations, you could be responsible for any unpaid lease payments by the new lessee.
Transferring the lease is also a way of negotiating a third-party buyout through another car dealership.
In this arrangement, the car dealership negotiates the buyout price with the leasing company.
Once a price is successfully negotiated, the dealership will issue payment to the leasing company and provide you with a check for the difference.
With a limited supply of new cars in the market, it’s less likely that leasing companies will allow lease transfers and car swaps. As a result, the value of used cars, particularly those that are less than three years old, is higher.
If you think it’s the Law of Supply and Demand at work, think again.
In 2023, the U.S. imported $210.3 billion worth of cars from 87 countries. 57.4% of the imported cars came from Mexico, Japan, and Canada.
The steady importation of cars increased the inventory of new cars in 2024. However, the demand for used cars is still high because new cars remain unaffordable.
Currency fluctuations, trade regulations, high demand for particular car models, and inflation can increase the prices of imported cars.
Given the current state of the car industry’s economy, it may be challenging to get approval for a lease transfer arrangement to another car dealer from the leasing company.
5. Return the Car
The final option to consider when the lease expires is to return the car.
Returning the car is an ideal option if:
- You switched to a work-from-home arrangement.
- You decided to use public transport more.
- Your financial situation has deteriorated.
Settle your outstanding accounts before the car lease agreement ends.
Your unpaid bills will appear as derogatory marks on your credit report and will lower your credit score.
Remember, the leasing company sends monthly reports to the credit bureaus. Your credit score continues to drop the longer your accounts remain unpaid.
Worse, if the leasing company declares your account as a charge-off, an agency might take over and collect the debt from you.
đź’ˇNote: If your credit score goes below 755, you might not qualify for a car loan.
Summary
The end of your car lease isn’t the end of the road.
You have other options to consider:
- Buy out your car lease.
- Trade in the car for a new lease.
- Transfer the lease.
- Extend the car lease.
- Return the car
Analyzing the economics of each option will guide you in selecting the choice that aligns best with your needs and financial capacity.
Whether you choose to extend your car lease, negotiate a buyout, or pursue a trade-in, keep your credit score top of mind.
You can lose track of the due dates of your bills even if the creditor sends you constant reminders. It’s easy to overlook monthly payments when you have many to make.
Lucky for you, there’s Cushion – a tool to keep your credit score healthy. Cushion is an app that tracks, organizes, and schedules your bills and BNPL arrangements on Google Calendar. Link a bank account to the virtual card and Cushion will pay your bills for you – on time, every time.
