by Dean Ballenger
One of the things we try to do in our agency is bring value to our customers. When we see something happening in the market that’s changing, an area where we think our customers need to be made aware, we want to make sure we give them proper advice.
If you’re thinking, “Why should I take your word for it, Dean?” here’s some background. After serving in the Marine Corps, I worked in the auto industry for 20+ years in my first civilian job. I held the positions of salesman, used car manager, new car manager, lease manager, and finance manager. So basically, I have insight into everything that has to do with purchasing or leasing a new or used car.
I’d like to share with you some things that will help you better understand how to get a better deal on a car, and how not to get taken advantage of in today’s market of high prices. And by the way, I’ve also been out in the market and won. In next month’s newsletter, I’ll share with you how I purchased myself a new truck and my wife a new SUV and got discounts.
There’s no way to share all this in one sitting, so this will be a four-part series to help you understand:
- Why and how you should shop the value of your leased vehicle before you turn it back into a dealership or drop it off at a location determined by your lender.
- Why buying a new vehicle rather than an used vehicle could actually be a better value.
- Why leasing a vehicle might be a better option if you’re on a budget.
- Why ordering a new vehicle might save you thousands, rather than buying a car or truck from the dealership’s existing inventory.
To begin, let’s talk about that first question – “Why and how you should shop the value of your leased vehicle before you turn it back into a dealership.”
Let’s talk about the options at the end of your lease. Most people think they have two options (1 and 2), when actually there are three:
- Buy your vehicle at the end of the lease
- Turn your vehicle back into the dealer
- Sell your vehicle (this is the most overlooked option!)
It’s a deeper dive, but to make a little more sense let’s first talk about the history of residual value and how it’s determined. In the early 80’s, car manufacturers found a way to speed up the trading cycle. Instead of giving rebates upfront to the client, they looked at the wholesale value of what a new vehicle would be worth in two years, added the rebate to that value, and called it a subsidized residual value – purchasing the car was not as good a choice as the lease. The payment on a 24 mos lease was less than the purchase payment for a 60 mos standard retail purchase. This process worked great until leasing became so popular that many dealerships, including the one I worked at, reached the point where 85% of new vehicles being sold were being leased, not purchased.
Of course, with every upside there is a downside. As a result of all this leasing, there were now so many vehicles coming back into the market that it began to drive down used car pricing, and those same subsidized residual values I mentioned earlier actually started to cost the car manufacturer far more than they’d accounted for when leasing first began.
So that brings us to now. To stop the loss, auto manufacturers had to align the residual value to an actual wholesale value. This means that if you decided not to purchase your vehicle, the dealership more than likely would – but even if they didn’t, the vehicle could be sold at a local auto auction for close to the residual value. The manufacturer could again focus more on selling new vehicles and focus less on what to do with end-of-lease vehicles being turned in.
Here’s the upside for you (and don’t forget, we said that one of your options was to buy it) – whatever perspective you hold concerning the existing market, there’s currently a significant shortage of new and used vehicles on the market. In fact, today’s average used car prices are about 30% higher than normal due to this current shortage of vehicles. However, your vehicle’s residual value was locked in based on its wholesale value when you first purchased it and should not change. This puts you in the driver’s seat when it comes to making a great purchase or an excellent profit should you decide to sell.
OK, enough theory. Let’s look at some real-life math:
Example #1 At the end of your lease, the purchase option is $10,000 and the used car market is up 30%, putting the price a dealership might be willing to pay at $13,000. Let’s say the average markup on an used car is $2,500, and the cost of servicing it is another $500. The dealership would price your vehicle at $16,000.
Since you only pay sales tax in Indiana on the lease payment, if you purchase your vehicle you will be charged the remaining 7% sales tax ($700) on your purchase price. More than likely, a document processing fee of approximately $199 will also be added. This would bring your total purchase price to $10,899.
What does this mean? In this example it means you could purchase your vehicle at the end of the lease (again, $10,899) for far less than it would cost you to go out and replace it. Your total purchase price without this option would be $16,000 + 7% sales tax ($1120) + doc fees ($199) … a total of $17,319.
Example #2 At the end of your lease, the purchase option is $20,000 and the used car market is up 30%, putting the price a dealership might be willing to pay at $26,000. Let’s say the average markup on an used car is $3,500, and the cost of servicing it is another $500. The dealership would price your vehicle at $30,000.
Since you only pay sales tax in Indiana on the lease payment, if you purchase your vehicle you’ll be charged the remaining 7% sales tax ($1400) on your purchase price. More than likely, a document processing fee of approximately $199 will also be added. This would bring your total purchase price to $21599.
What does this mean? In this example it means you could purchase your vehicle at the end of the lease (again, $21599) for far less than it would cost you to go out and replace it. Your total purchase price without this option would be $30,000 + 7% sales tax ($2100) + doc fees ($199) … a total of $32,229.
“Okay,” you say, “but I don’t want this car. I’d like to find a different car.”
If that’s how you feel, it’s a pretty simple process. Thirty days prior to your lease coming to term, make three phone calls to car dealerships near you and ask for what’s called a “buy bid” – this is the term dealerships use, letting them know you want to sell them your car without purchasing a car. You can also do this with an online car company like Carvana or CarMax – while we don’t endorse any specific company, we’ve used these companies for quoting as described above.
What’s nice about the “buy bid” option is that, unlike trying to sell it on your own (you know, where you’re trying to coordinate all kinds of strange people during strange times wanting to come by your house and eat up lots of time looking at your vehicle), this one’s simple. You find the dealership with the highest bid, you take it to their location, they write you a check, and you go home.
When’s the last time you
made three phone calls
and made $2500 in one hour?
I know what you might be thinking – “But hey, what about the sales tax paid when I purchased the vehicle at the end of the lease? Is it out the window? Did I just throw that money away?” No, not really, because in our current market it’s extremely likely you made a lot more selling it than you would have had you traded the vehicle in – you get to put all that extra money in your pocket!
One more thing – if you’re not planning to purchase your vehicle at the end of the lease, you should still consider requesting a buy bid before going to the dealership to make another purchase. This way, you have a clear understanding of the actual value of your vehicle before you trade it in on another one. Why is this important to know? Because there are many different ways an auto dealership makes money – one is on the markup of the new vehicle (which is called profit), and the other is talking you into settling for less than your vehicle is actually worth (this is called rolling the tradeback).
I hope you find this helpful. Coming up:
Why buying a new vehicle instead of an used vehicle might be a better value.
Why leasing a vehicle might be a better option if you’re on a budget.
Why ordering a new vehicle might save you thousands, rather than buying out of the dealership’s existing inventory.
