Can You Lease A Used Car?

Leasing companies want you to lease new automobiles from them and continue to trade them in for another new automobile. You won’t see used-car leasing advertised nearly as often as new-car leases because the profit margins are smaller for the dealership.

The benefit of leasing a used car vs. new is the same argument for buying a new vs. used car. Cars depreciate in value over the course of their lives, but they lose value much more quickly in the first couple years.

We’ll review the pros and cons of leasing a used car and help you decide what makes the most financial sense for you in the long run.

Leasing a used car relies on similar processes and principles as new car leasing. The main difference will be in cost and availability. If you’re looking at used vehicles, it’s possible you’re looking at previously leased vehicles. Let’s start with a review of what likely happened on the first lease round.

The Concept Of Leasing

The day a lease agreement is drafted, the leasing company will estimate the residual value of the car at the end of the lease. Residual value is a predetermined value estimate of what your car may be worth at the end of the lease, usually expressed as a percentage of the car’s MSRP (manufacturer’s suggested retail price). That’s different from resale value, which factors in the condition of the car, the state of the market and mileage.

Over the course of a lease term, your lease payment goes toward the depreciation value, which is the difference between the residual value and the MSRP. A high residual value means you’ll pay more for the car, and a low residual value means you’ll pay less. Used car values will be low because the cars in the leasing company’s fleet have already depreciated in value.

For example, a new car that costs $25,000 MSRP may have a residual value of 60% after 3 years, or $15,000. That means the lessee will pay $10,000, its difference, over the course of 3 years. Then, the lessee returns the car, pays any overdraft mileage limit fees and walks away. This is where you come in.

Certified Pre-Owned Vehicles Explained

Car dealerships are likely only going to lease out a used car if it’s certified pre-owned (CPO). To even begin the accreditation process, the car has to be less than 4 years old and with less than 48,000 miles on it.

Then, the manufacturer performs a full factory multipoint inspection that examines hundreds of parts, in order to confidently extend the original warranty, a bumper-to-bumper warranty or powertrain warranty.

In short, CPO vehicles are certifiably more reliable. If a used car is not CPO, it doesn’t mean it’s a bad vehicle – it just means you should take the time to do your own inspections before you lease or buy.

There are many benefits to leasing a used car, especially if it's a CPO lease car that has additional warranties in place. Compared to leasing a new vehicle, a used vehicle lease will save you money on a monthly basis. That said, when you compare leasing vs. buying a used car, you could save more money in the long run by just buying a used car outright.

Pros

Lower monthly payment: A good reference point to have is to compare the monthly payment for a new car lease with the same make and model used car option. You’ll likely find the monthly payments to be much cheaper on a used lease.

Extended warranty: CPO vehicles typically come with extended warranties to ease used car shoppers’ worries about maintenance costs.

Cheaper auto insurance: Because used vehicles are valued less than new vehicles, it will also cost you less to get car insurance.

Lease-end purchase option: Leasing a used car allows you to make lower monthly payments and test out a car for a few years. At the end of a used-car lease, the buyout would be even cheaper than if the car was new to begin with.

Cons

Hard to find: The CPO element of used car leasing means that your best bet is to go to a franchised manufacturer’s dealership. The National Automobile Dealers Association (NADA) lists the following manufacturers as offering used car leasing: Acura, Audi, BMW, Chrysler, Dodge, Ferrari, FIAT, Honda, Hyundai, INFINITI, Jeep, Kia, Lexus, Lincoln, Mazda, Mercedes-Benz, MINI, Mitsubishi, Nissan, Porsche, RAM, Toyota, Volkswagen and Volvo.

Wear and tear: While the vehicle will likely have a multipoint inspection and be in tip top mechanical condition, you’re still getting into a car that somebody else used for several years. If the interior wear and tear is bothering you, try leveraging that into a paint and fabric warranty lease deal.

No equity: Leasing a car, whether used or new, is much like a long-term rental. At the end of the term, you return the car, pay the fees and are left with nothing, unless you decide to buy the car at the end of the lease.

If the most compelling argument for a used-car lease is that it offers short-term transportation on a budget, you may want to consider a lease transfer. Lease transfers allow leaseholders to get out of a car lease by transferring it to a new leaseholder. You could take over an existing lease right where the previous leaseholder left off. You can browse and filter for the number of months left in a contract, by monthly payment and other terms on lease swap websites like SwapALease.com, LeaseTrader.com and LeaseQuit.com. The downside to transferring your lease, though, is you’ll still likely pay fees on the transfer and may remain liable for the payments if the new lessee defaults.

In the new vs. used debate, used is always going to win for lower overall costs and monthly payments. Certified pre-owned cars offer the best of both worlds, with lower costs and an extended auto warranty.

If you want to really consider saving money, swap your lease agreement for an investment opportunity. Instead of paying a leasing company to return your vehicle, you can sell it for money. First, you have to have ownership. Hint: if you can swing it, buying beats leasing cars.