Consider These Points Before Buying Your Leased Car

If you spent any time shopping for a car during the COVID-19 pandemic, it’s likely that you experienced some sticker shock.  Many supply chains were shut down, leading to microchip shortages and a lack of other key auto components such as airbags. Used cars were in high demand and many of the new cars that were available were being sold for more than the MSRP.

While there are now signs of improvement within the auto industry, Consumer Reports states that “automakers still have lower-than-normal production targets for the rest of 2022,” which results in fewer new cars. Additionally, rising interest rates may impact buyers who need to finance their purchase.  If you’re nearing the end of a car lease, you should carefully consider all your options before deciding what your next step will be.

Is your leased car worth more than its buyout price?

  • If you began your lease prior to the pandemic-influenced price increases, it’s possible that your buy-back price in your lease contract is well below the current market value, and you can buy your own car for less than you could from a dealer.  This can be a good option if you plan to keep the car at least 5 more years.
  • If you are not interested in keeping the car, but find that it is currently more valuable than your buyout price, there may be an opportunity to purchase the vehicle, sell it, and keep the profit.

Traditional rules still hold true.

  • If you are way under your lease mileage allowance, your car may be worth more than its buyout price and purchasing it may be a good deal.
  • If you are significantly over the allotted miles then you could be facing expensive penalties. Calculate these costs to help determine if purchasing the car might make more sense.

Benefits of leasing through your business

  • Certain tax deductions are available to those that can lease their car through their business that are not available for personal leases.  This can include the lease payments and maintenance of the vehicle.
  • If the vehicle is used for both personal and business use, a proportionate percentage of the expenses can be deducted.

Buying the car is not always the right choice.

  • For example, if you need to take the funds from your IRA to pay for the car, your additional costs may be more than you think. For example, if your buyout price is $30,000 and you are in a 25% tax bracket, you would need to withdraw $40,000 from your retirement account. This is to pay $10,000 (25%) in taxes and $30,000 to the dealer for the car.
  • Consider the bigger picture costs:
    • You now no longer have that $40,000 growing in your retirement account.
    • The $10,000 you paid in taxes may be more than the increased value of the car. You must weigh the buyout value against the fair market value, and what your profit could be versus the economic benefit.
    • If you prefer driving new vehicles and typically lease car after car, you may not want to hold this car for another 5 years. Even though the monthly cost of a new lease could be a bit higher, it may still prove better economically than pulling a sizeable chunk of cash out of your IRA and paying taxes.

Before making a decision on whether to purchase your leased vehicle, be sure to review the fine print of your lease agreement. Costs of options available to you may vary depending on your specific contract, and if your vehicle is leased through your company, different rules may apply.  If you have any questions, please contact us.