At the end of their lease, many people turn in that old vehicle and lease another one. They like driving something new––and when they see the residual amount (the predetermined purchase price), it doesn’t make any economic sense to buy that old ride.

The current shortage of new and used cars has changed that economic equation, at least for now.

Listen to audio highlights of the story below:

With used car and truck prices up 16 percent over the past year, and 50 percent more than before the pandemic, according to Forbes, the market value of vehicles coming off lease right now is often well above the residual set by the finance company two or three years ago. As a result, you may find that buying your vehicle as it comes off lease will result in a sizeable windfall.

Eric Steinmetzer of Seattle was “excited and delighted” to find out how much things have changed when the lease on his Cadillac Escalade ended. The residual value, which had been set three years earlier, was so much lower than the current value, he decided to buy the car.

“So, instead of looking for another lease, as I’d normally do, I just went ahead and financed my car because of the great value it had,” Steinmetzer said. “I was able to stay in a great car that I loved, and I lowered my payments by $500 a month. It was free money.”

Robb McCalmon, general manager of Kendall Chevrolet and Subaru in Marysville, Wash., has been in the business for more than 20 years, and he’s never seen anything like this before.

“With a lease, the manufacturer takes all the risk,” McCalmon told Checkbook. “If the car is worth $20,000 at the end of the lease and your buyout is $25,000, you can just turn it back, and the manufacturer deals with the loss. Well, it’s the opposite now. People are coming in at the end of the lease, and they’re in a good position.”

It’s not uncommon for lease customers to have $4,000 to $6,000 in equity, McCalmon said. With some luxury vehicles that equity could be higher.

If the residual value is more than the market value, but the customer still wants to turn in their leased vehicle, dealers will apply that equity towards the purchase or lease of another vehicle.

“Some people are coming in and they’ve got $5,000 equity, and they buy or lease a new vehicle and leave with a lower monthly payment,” McCalmon noted. “And in a market where payments are normally going up because of inflation, they’re coming out pretty good.”

Desperate to acquire used vehicles, some dealers are letting customers turn in their cars with a few months left on their leases, making the last few payments for them and waiving early-termination penalty fees.

You can get a rough idea of what your car is worth by checking Edmunds.com or KBB.com. When I bought a new car a few years ago, and traded-in my old one, I got the best offer by taking the car to a dealer. With the current shortage of used cars, some dealers are paying top-dollar for clean, well-maintained, low-mileage used vehicles—but collect offers from several interested buyers to make sure you get the best price.

Taking a U-Turn on Advice

Consumer advocates, including Checkbook, have consistently advised against leasing a new vehicle, (except for those who have specific business or tax reasons for doing it, or who buy a new car every two or three years), because over the long run leasing usually costs more than buying.

The advice hasn’t changed, but for those who already have a lease, auto experts are recommending—for the first time—that buying that vehicle could be a smart move.

“It usually doesn't work out to buy your leased vehicle, because the leasing company is always going to create the terms of the contract in their favor, but these are special circumstances,” said Ben Preston, a reporter with Consumer Reports Autos. “The price you pay on a lease buyback right now, because the price was calculated pre-pandemic, might be less than the market value of the car. So, if you were to buy that same car on the used car market, you’d probably pay significantly more for it.”

Jack Gillis, author of The Car Book, and member of Checkbook’s board of directors, points out that buying your car at the end of the lease reduces the risk of buying another used car with mechanical problems or safety issues.

“You know exactly what experience you had with that car,” Gillis told Checkbook. “If you’re buying another used car, you’re really buying a pig in a poke, because you really don’t know what experience [the previous] owner had. So, if that car has treated you well, and you like it, buy it and you could save yourself thousands of dollars.”

Leasing Doesn’t Make Economic Sense for Most People

It’s easy to understand why leasing is so appealing. The monthly payments are smaller than buying, the downpayment is typically less, and dealers offer a variety of incentives to lease.

This can help your cashflow, or make it possible to drive a vehicle you couldn’t afford otherwise. Other benefits: The vehicle is always under warranty, you save money on the sales tax, and you don’t have to worry about selling the vehicle when it gets old.

But do the math, Gillis said, and you’ll see that leasing costs more. And that’s because you are paying for the rapid and significant deprecation that takes place when a new car drives off the lot.

“I always recommend buying the car versus leasing it—and especially today, because lease prices have gone up, and the residual values are now going up to reflect today’s superheated used car market,” Gillis said. “So, at the end of that lease in two or three years, if you wanted to buy that vehicle, it's going to be very expensive.”

There can also be “sticker shock” at the end of the lease if you’ve gone over your mileage limit, or there’s more than normal wear and tear. “That's when it's going to cost you,” Gillis said.

Consumer Reports compared buying vs. leasing and concluded that as attractive as a lease may appear, there are a number of disadvantages. It “usually costs you more than an equivalent loan,” and if you lease car after car (as many people do), your monthly payment goes on forever.  When you buy a car, the longer you own it after the loan is paid off, the more value you get out of it.

CR’s advice: “Over the long run, the cheapest way to drive is to buy a car and keep it until it’s uneconomical to repair.”

If you're in the market for a new car, but don’t need one right away, you might get a better price if you can wait until next year. It may take that long for manufacturers to deal with the current production problems.

Related Advice

• The Pitfalls of Taking Out a Really Long Car Loan
• How to Get the Best Price on a New Car (whether you buy or lease)
• Ford to No Longer Allow Customers to Buy Electric Vehicles at the End of Their Leases