Leasing 101: How to Handle the End of a Car Lease

It’s been a while since you leased your new car; with luck, it’s been a great experience. Today, though, you realize that the lease term is almost over — what happens now?

The short answer is that you have three choices: to return the car, trade it in on a new lease, or buy it. But how do you decide which choice is the right one? And how do each of those possible choices play out?

Planning for the Future

Start thinking about what you want to do with the car a few months before the lease ends. Definitely don’t wait until a couple of days before you have to return the car to formulate a plan — although, if you do, some lease companies will extend your lease on a month-to-month basis for a short period.

The first question to ask yourself is if you want to keep the leased car. If so, you just need to pay the leasing company the amount spelled out in the lease and then the car is yours. This usually isn’t the best financial move, since it would’ve been less expensive overall to have simply purchased the car in the first place. It’s not uncommon for people to do this, however, either because they couldn’t afford the higher purchase price up front or just because they have come to really like the car.

If you’re thinking about returning the car or trading it in on a new lease, now’s the time to think about what you’re going to replace it with. Many companies will offer incentives, such as eliminating your current car’s disposition fee, if you lease a new car from them. Be sure to check with your dealer about any such opportunities.

Return Inspection

Unless you inform the lease company you are going to buy the car, they will schedule a so-called return inspection. You’re not expected to return a leased car in showroom condition, but it should be free of any damage that will make it harder to resell. The difference between normal and excessive wear and tear, and damage that is allowable versus not, is described in the fine print of the lease contract. Many companies also have useful end-of-lease guides that further illustrate this information.

Prior to the inspection, it’s in your best interest to have the car looking as new as possible both inside and out. Having the car professionally washed and/or detailed serves a couple of purposes. First, it will eliminate many stains, scuffs, and marks that the inspection might list as damage that needs to be repaired. Second, the newer the car looks the more leeway the inspector is going to give it; he or she is just human, after all.

The return inspection is usually done a month or two before the end of the lease. After the inspection, which is performed either by a dealer or by an independent agent, you will receive a list of any items you are responsible for fixing. While the particulars of what’s considered excessive wear and tear vary from company to company, it’s usually better to handle repairs yourself than to have the dealer do it. This way, you are free to shop around for a better price — just make sure you keep all receipts to prove the work was done.

Tires are a great example. If there is less than 1/8-inch of tread on a tire, it will need to be replaced. In addition, you’ll need to replace any tire of a different brand or size from the rest. In either case, a local tire store should be much less expensive than a dealer.

Another good example is bumpers. If the car’s bumpers are severely dented, damaged, or have patches of paint missing, a local body shop will charge less than a dealer for the same work.

That body shop is also the place to go to fix serious scratches in the paint (or you can try your hand with automotive touch-up paint and a very thin brush). If the bodywork has any significant dents that haven’t damaged the paint, a paintless dent-repair outfit is the way to go.

Don’t feel obligated to avoid the dealer, however. If the return inspection reveals only one or two small issues and the price seems reasonable, the convenience of having the dealer fix everything may be worth the higher cost.

Trade Equity

One of the advantages of leasing a car is that you have the option to return it when the lease is over — but that’s not necessarily the smartest financial move. The key is the difference between the residual value spelled out in the lease, which was calculated when you first leased the car, and the car’s actual market value at the end of the lease. If the car is worth more than the residual value, that positive equity can be used to pay down the amount you owe on another leased car.

You may have positive equity for a number of reasons, the most likely of which is the lease company set the residual value too high. This may have been intentional, as part of an effort to move more leases by keeping monthly payments as low as possible, or perhaps the company’s predictions two or three years earlier were wrong. Another possibility is that you drove the car far fewer miles than were allowed under the lease, and the car is now worth more simply because it has lower mileage. Whatever the cause, if you return the car you’ll lose that equity.

 

It’s not unusual for people to be a bit worried about the end of a lease, particularly if they are returning the car and facing a bill for repairs or excess miles, but such anxiety is usually optional. If you’ve taken good care of the car and stuck to the prescribed mileage, you should be able to return it without a problem. If you decide to trade in or buy the car, the dealer will be happy to assist you.