Does Your Leased Car Have Equity? 

by | Aug 10, 2023

For people who wish to drive a new car without the obligation of a long-term loan, leasing has grown in popularity. 

For a predetermined amount of time, typically two to three years, you rent a car when you lease one. You also have the choice to either return the car or purchase it altogether at the end of the lease. 

Many consumers prefer leasing because it spares them the headache of selling or trading in their old car every few years. Compared to financing a car purchase, leasing also offers lower monthly payments. Finally, if you don’t have much money saved up for a down payment or would rather keep your cash flow flexible, leasing can be a smart alternative. 

However, given the increased value of used cars as a result of pandemic supply chain restrictions, it’s important to take into account if your leased car has equity before you turn it in. 

Increased demand and value 

The pandemic supply chain restrictions are currently one of the greatest issues influencing the value of used automobiles. Many automakers were forced to reduce production or briefly close operations due to a scarcity of computer chips and other components. Due to a lack of new vehicles available on the market, this has increased demand for pre-owned vehicles. As a result, used car prices increased dramatically. 

This may be good news for people who are leasing a car. This is because if the car’s value has gone up, there’s a good chance that you could have equity in the vehicle. 

What is Equity? 

Equity is the difference between the car’s actual value at the end of the lease and its residual value, which is the sum you committed to pay for it at the end of the lease. 

If the car’s actual value exceeds the residual value, you may have equity that you can use to lease a new car or keep for yourself if you decide to buy the car out of the lease and sell it on the open market. 

If you’re leasing a car and want to know if you have equity in the vehicle, here is how.

Step 1 – Get an Estimate

  • You can get an estimate of the value of the car by looking up the make, model, and year on websites like Kelley Blue Book or Edmunds. This will give you a rough idea of what the car is worth. 
  • To get a more accurate estimate of the value of your leased car, you can also take it to a dealership or have it appraised by an independent appraiser. The dealership or appraiser will look at the condition of the car, the mileage, and any upgrades or options to determine its value. 

Step 2 – Find out the buyout price 

  • Next, you’ll need to find the buyout price for your lease. This is the amount you agreed to pay for the car at the end of the lease if you decide to buy it. It is typically negotiated at the beginning of the lease so that it may be different than the actual value. You should also be able to find the buyout price in your lease agreement or by contacting the leasing company. 
  • Once you know the estimated value of the car and the buyout price, you can compare the two to see if you have equity in the vehicle. If the actual value of the car is higher than the buyout price, this is the equity you have in the vehicle. For example, if my car is worth $30,000 and the trade-in price is $25,000, the equity in the vehicle is $5,000. 

Know your options 

You have a few options if your leased car has equity. After the lease expires, you can either purchase the vehicle or sell it on the open market. This might enable you to keep the equity and utilize it as a down payment for a new car or other needs. 

Another choice is to trade in the vehicle at a dealership for a new lease. The equity in your old car can reduce the price of a new vehicle. 

Additionally, if you want to lease a new vehicle, the dealership knows that you have these options. Most dealerships are upfront about this, but if they don’t, consider working with a more forthright dealer. 

Work with a Forthright Dealer 

Dealers usually emphasize monthly payments rather than total price in the negotiation process so make sure to work with a dealer who is open about the equity in the car and who will give you what is due to you. 

Some dealers may try to lowball you or hide the true value of the car to make a profit. To avoid this, do your homework, acquire several estimates, and get them to show you where the equity is in the calculation. Make sure it aligns with your understanding and the estimates you have obtained. You might look back and be glad you did.

For more financial planning content, you may visit our website and read our blogs at Kreitler Financial. Learn more about our services and contact us today!