By Jordan W. Charness
Most people keep their cars for about four or five years. If you are leasing a car you are likely to change cars when the lease expires rather than purchasing the car by paying the buyback value. According to the contract however you are not obligated to return the car at the end of the lease.
A buyback value is a predetermined amount that is set when you initially lease the vehicle. This is the contract value of your car at the end of lease. It has no direct relation to market value. It is actually an estimate of what the car is likely to be worth three, four or five years down the line.
You will note that you have no input whatsoever in this decision. For that matter your sales representative does not have much leeway either. The values these days are all chosen by computer based on a predetermined formula. This formula is reasonably accurate in predicting the future value of your car.
The only two parties that are truly bound by this official buyback value are the leasing company and you, the consumer. If at the end of the lease you feel that your vehicle is worth more than the agreed-upon value, you will have the right to pay the agreed-upon value to the leasing company and sell your car privately and make whatever profit there is to make.
If your car turns out to have a market value that is less than the predetermined agreed-upon value you can just give the dealer back the keys and the car. The leasing company will suffer the loss and not you.
There are however several factors that influence the market value of your vehicle at the end of the lease. On leasing a car, an assumption is made that you will probably drive it 17,000 to 20,000 km per year. If you drive your car significantly less than the expected mileage, the market value of your car at the end of lease will probably be higher than the agreed-upon buyback value.
Your car is also expected to be returned with signs of normal wear and tear. If you’re the extremely fussy type who polishes and cleans your car every week and is extremely careful to avoid parking lot rash and flying stone chips, you may have also increased the market value of your car.
Certain cars and models tend to keep their value better than others. A new model that sold only a few vehicles when you bought the car may pick up steam and respect and become hotly sought after by the time your lease is over. Similarly a car that is out of production may or may not have more value than the computer thought it would four years previously.
In all these cases it may be worth your while to see if you can sell the car privately at the end of the lease. Don’t forget however that you are not the owner of the car: the leasing company is.
When you are doing the paperwork for the sale you will need their permission to transfer the car to someone else’s name. They will only give you that permission once they’ve received everything they are due under the contract. This does not stop you from arranging the sale and finding a buyer but it does stop you from proceeding with the actual sale until all the other legal formalities are taken care of.
You are also operating under a deadline. There is a specific date where you must return the car. It is clearly listed in your contract so if you have not found a buyer by that date you may have to either advance the money to pay off the leasing company in the hopes that you will sell it for more later, or just give up and give back the car.
Don’t forget that if you return the car in worse condition than normal or with more kilometres than had been agreed upon you will be required to pay damages to the leasing company to cover the loss of value that you caused by your actions.
Just about every car returned on lease is taken to auction where it is sold to used-car lots and in most cases the leasing companies get pretty much what the expected to when they signed your lease way back when.