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I have a friend whose four-year lease on a 2018 Honda Civic was coming due soon. He says the dealer gave him $3,000 for his old car when he signed a lease on a brand new Civic. I find this hard to believe, but apparently, it’s because used car prices are so high right now. I don’t really get it. Is there something in the leasing contract that says they have to pay you if values go up? – Linh, Regina

With used cars in high demand now, you might get some cash back when you hand in the keys on a lease – but, ultimately, it’s the dealer’s choice.

“Used car prices today have skyrocketed – they’re higher than anyone would have thought when you signed the lease 24, 36 or 48 months ago,” said Andrew Tai, automotive industry expert and co-founder of Unhaggle, a car shopping site. “The dealer wants the car and they know they have to pay you something so you don’t buy it back yourself.”

So, how does that work? Welcome to Leasing 101.

At the end of a lease, you have two options: You can either buy the car at a price stated in the original leasing agreement or you can hand over the keys and walk away.

If you walk away, usually there will be no extra costs other than wear and tear, as long as you’ve made your payments on time.

But the price to buy it back was set when you signed the lease – on a 48-month lease ending this year, that would have been in 2018 – and it was based on a prediction of what your car would be worth in four years time.

That prediction is called the residual value. It’s a percentage of the original suggested price.

“In 2018, when those residual values were set, we were in an oversupplied market,” said James Hancock, director of OEM (original equipment manufacturer) strategy and analytics with Canadian Black Book. “But now, because there are not enough new cars because of the semiconductor shortage, people are looking for used cars and are willing to pay more for your car.”

Dealers caught in a squeeze

In mid-February, the average used-car price in Canada was $34,594, up 47 per cent compared with the same time last year, according to figures provided by CBB.

So, let’s say you leased a car in 2018 with a $50,000 sticker price.

“At that time, a typical car would be worth 50 per cent of its MSRP (suggested price) after four years – so, $25,000,” Hancock said.

Your lease payments covered the difference between the original $50,000 price and the $25,000 residual value.

You would pay $25,000 in lease payments over those four years and then have the option to buy it back for $25,000 at the end of the lease.

But with used car prices soaring, that car hasn’t depreciated as much as first predicted and it’s now worth a lot more than that $25,000. So, if it was worth $30,000 now, the lease guarantees you the option to buy it for $25,000. Meaning that you could make yourself a tidy profit if you bought the car outright and then resold it.

Because dealers have so few new and used cars in their inventories right now, they don’t want you to buy it. They would rather buy it back so they can sell it for more than you’d pay them, Tai said.

“The dealer knows the [current] market price of the car, so as these leases are being returned, they’re being quite smart about it,” Tai said. “Dealers are starved for inventory right now. When you drive by a dealership these days, it’s like, ‘Are they even still in business?’” Tai said.

But there’s a catch. Your dealer probably wouldn’t just give you a cheque for $5,000 when you hand in the keys, Hancock said. But they might give you the money if you agree to buy or lease a new car from them.

Sellers’ market?

If you’re trying to make money on your lease, you have another option. You can buy the car back from the dealer at the price stated in the lease, and then try to sell it yourself to someone at a higher price, Tai said.

“You should figure out the true market value of your car; you can go to Autotrader or Canadian Black Book,” Tai said. “But you have to take that with a grain of salt. What something is worth might not be what someone will actually pay for it.”

If you buy it back for $10,000, you might be able to sell it for $13,000 or $14,000, Tai said. But for some, listing the car, showing it and selling it might be too much of a hassle, and you may just want to hand your keys back to the dealer and walk away, Tai said.

With used cars worth so much right now because there are waiting lists for new cars, you may not have to wait until the end of your lease to get a payout, said George Iny, president of the Automobile Protection Association (APA), a membership group that promotes consumer interests in the marketplace.

Some dealers are offering customers the chance to end leases early without paying a penalty that can range from $299 to $1,000 – and they may offer you a bonus on top of that, Iny said.

“Ending a lease a bit early, say, in the last three to six months, does make sense, as does arranging a payment above the residual value at the end of the lease,” Iny said in an e-mail. “You will need another vehicle, so securing your next one [first] is important.”

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