The financial media is full of articles about how to “beat” inflation, but most contain little, if any, practical or actionable advice. They’re usually more insulting than helpful; chiding the reader for supposedly wasteful spending.
Let’s focus on one problem at the time, and look at how to beat inflation if you happened to lease a vehicle during the past few years.
Leasing 101
With vehicle leases, you make regular payments over a short, fixed term (typically three to five years in Canada). Unlike with financing, lessees mostly pay for the depreciation costs of a vehicle, which results in lower monthly payments.
For example, if the list price is $30,000 and the lender sets a 36-month residual value of $21,000, then the total depreciation expense is $9,000 over a three-year lease term, which is $250 per month. This car’s monthly payment would consist of this depreciation expense, plus finance charges and taxes.
Once the lease expires, you either buy out the lease for the residual value of the vehicle or turn it in – usually to lease a new car.
Vehicles leases offer inflation protection
With a leased vehicle, payments are calculated based on the difference between the car’s selling price and its residual value. Residual value is the vehicle’s deemed value at the end of the lease term — set at the start of the lease.
Your buyout is set at the time you negotiate the lease and this is why buying out a lease right now is one way to actually “beat inflation”.
Lease equity
Lease equity is the difference between the residual value — also referred to as lease payoff or buyout amount or balloon payment — and the price the vehicle could be sold for.
If you have a lease, you should check out Kelley’s Blue Book. Input your vehicle’s particulars and you’ll get an instant estimate of its current value according to this trusted and widely followed resource.
In most cases, market conditions and inflation have driven the value of your leased car well above the lease buyout price, which was set back when you signed the lease. And, this amount cannot be changed at any time during the lease term.
I recently bought out my five-year lease and when I checked, Kelley’s indicated that I have more than $15,000 in equity on my very low-mileage small SUV that’s in excellent lease-return condition. This explains why I received countless offers to buy out my vehicle during the last two years of my lease.
While COVID has been bad in many ways, it’s actually created some upside for those with vehicle leases that are about to expire. Forget about negative equity; people are closing out their leases with the ability to buy the vehicle for well below its current market value. This is practically unheard of, especially since most vehicles are said to depreciate at least 10% the second they’re driven off the lot.
My lease is up, now what?
Once the lease term is up, you either have to buy out the vehicle or return it. Most Canadians who lease don’t buy the vehicle, but instead return it for a new leased vehicle.
But, maybe it’s time consumers changed their ways, especially amid the highest inflation in decades?
A global chip shortage and supply chain issues for new cars have made them hard to come by and very expensive. They are sometimes even missing features because of the dearth of chips. The person who handled my lease buyout said cars are now routinely delivered with a single key fob so they can sell two cars instead of one, with the second fob set to be delivered at a later date.
Used car prices have also skyrocketed so you could sell the vehicle at the end of your lease and net a profit that way.
Anyone with a vehicle lease needs to seriously consider cashing in on a rare opportunity to actually “beat inflation” and end their lease with positive equity.
