Car lease ending soon? Another one may not be your best option

Personal Finance

Ty Wright | Bloomberg | Getty Images

If you’re nearing the end of your car lease, don’t assume another one is your best option this time around.

While many consumers go from lease to lease — which puts them in a new vehicle every few years — the pandemic has upended the auto industry. This generally means the calculus has changed for whether another lease makes sense, experts say.

For starters, “the ability to get access to the car you want quickly isn’t there,” said Pat Ryan, founder and CEO of car-shopping app CoPilot. “You might be waiting three to six months for it.”

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An ongoing global shortage of microchips — key components needed for today’s autos to operate — that began last year continues to impede manufacturers’ production of new vehicles, which has translated into demand outpacing supply. 

The average time a new vehicle sits on a dealer lot before being sold is 26 days, according to a forecast from J.D. Power and LMC Automotive. Two years ago — before the pandemic hit — it was 62 days. An estimated 54% of vehicles were sold within 10 days of arriving at dealerships in October. 

That supply imbalance has pushed the average amount paid for a new vehicle to about $44,000, according to the J.D. Power/LMC forecast. That’s 19.3% higher than October 2020 when the transaction price averaged $36,887.

Part of the reason for record transaction prices is that manufacturers have slashed their incentives because, generally speaking, they don’t need to offer big discounts to sell cars right now.

Consumer demand also has spilled into the used-car market, pushing values there up, as well. For vehicles that are 1 to 3 years old, the average retail price is $38,974, a 46% jump from $26,627 two years ago, according to CoPilot.

The good news for lessees is that your current car may be worth more than anticipated — and give you a chance to capitalize on the difference.

You’re sitting on a profit but if you turn it in, you’re giving the dealer that profit.
Pat Ryan
Founder and CEO of CoPilot

In other words, you may be able to buy out your lease for less than what you’d pay for the car if it were sitting on a dealer’s lot right now. This is because the residual value — the vehicle’s worth at the end of the lease — was established when you signed the lease several years ago.

“You paid for depreciation that didn’t take place,” Ryan said. “You’re sitting on a profit but if you turn it in, you’re giving the dealer that profit.”

Additionally, the bells and whistles you have on your existing car may not be on the next one, he said. Due to the chip shortage, some features — such as driver assistance and monitoring systems, or blind-spot monitoring — have been suspended by some automakers.

“You may not get new features on the next car or even the features you currently have,” Ryan said.

And, with prices on cars at record highs, the next lease would reflect those increased values, he said.

“What we’re telling our members to do is buy out and keep an eye out,” Ryan said, adding that when inventories eventually return to normal levels, you could generally expect to see prices normalize.

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