Car Leasing Is About to Get Much More Restrictive
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Car leasing has been a popular way for many Americans to acquire new cars. While many people have an opinion on whether is it better to buy or lease from a long-term financial perspective, leasing remains popular nonetheless.
In some cases, leaseholders might see a nice little chunk of cash at the end of the lease through a practice sometimes referred to as third-party sales. In others, the leaseholder could expect a low four-figure payout.
Not a bad bonus by any standards. However, these practices have been restricted by several major car companies—and more are likely to follow suit, according to U.S News & World Report.
Here is what you need to know about the coming restrictions on leases.
Some car leasing practices have been banned by major car companies.
What is car leasing?
Instead of buying a new car outright, customers have the option of leasing the car instead. They make monthly lease payments for an agreed amount of time. At the end of the lease, they return the car to the dealer.
In many cases, leaseholders have the option to buy the car at the end of the contract. Typically, the buyout price is determined by a residual value established at the beginning of the lease.
However, trying to forecast the value of a pre-owned vehicle years in advance is not a perfect science. In some cases, the residual value is lower than the actual market value at the end of the lease.
Mileage also plays a role. Leaseholders who drive less generally have a better chance of the car having a more profitable market value. In a sense, this has incentivized leaseholders to drive less, which may also earn them low mileage discounts on car insurance.
Profit opportunities for third-party selling on car leases
For leaseholders in this fortunate situation, they could easily sell the car’s purchase rights to a third party. This was contingent on the permission lessor, but normally this permission was always granted.
Frequent buyers of these leased cars were often nationwide chains that sold used cars. This included traditional car lots like CarMax, as well as newer online-only dealers like Carvana and Vroom. It seemed like this was a win-win situation for everyone. That was until the pandemic happened.
The beginning of the end
The pandemic caused monumental shifts throughout the auto industry. The chip shortage hurt the supply of new cars. The decreased usage of rental cars hurt the supply of used cars. Everybody in the car business is hurting for supply, used or new.
To shore up inventories of used cars, many lessors are forbidding the practice of third-party sales. This allows them to restock their used car inventories, albeit at the ire of lessors.
Current car companies that have stopped allowing third-party sales include Nissan, Infiniti, Honda, Toyota, GM, Ford, and Mazda, as reported by U.S. News & World Report. It is expected that many other car lessors will join the trend.
Leaseholders still have the option to buy and resell the car on their own. Of course, this has added risk and titling fees that will chip away at the profits. It won’t be as simple as sending a few emails like it used to be.