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Car lease coming to an end? What will happen next?

As a rule, leases are taken out for three to five years. At the end of this period, a decision has to be made whether to buy the car out, exchange it for a new one, sell it or extend the lease. Martin Ilves, Head of Coop Pank Liising, explains the options in more detail.

When you lease a car, you choose between a finance lease and an operating lease. In the case of a finance lease, the full price of the vehicle is paid as lease payments and at the end of the leasing period the lessee becomes the owner of the car. In the case of a finance lease with residual value, the monthly payments are lower, but you have to pay a higher amount of the residual value as the last payment to become the owner of the car.

An operating lease is usually chosen when the car owner’s objective is not to become the owner of the car at the end of the leasing period, but to lease a new vehicle, for example. At the end of the leasing period, you can either return the vehicle or buy it out at its residual value.

1. Buying out the car
Although the specific terms and conditions are set out in the lease contract, the general rule is that if the annual kilometrage of the car is around 20,000, the residual value of the car at the end of the leasing period is around 30 percent of the purchase price of the vehicle. For example, the residual value of a vehicle with an initial cost of €20,000 is approximately €6,000 at the end of a 5-year lease, and the user becomes the owner of the vehicle when they pay this amount. This requires the payment of a larger amount as a lump sum, but there is no need to pay lease instalments or interest in the future and the owner of the vehicle may decide whether they wish to continue with comprehensive insurance or not.

2. Lease extension or car loan
Financing can also be extended after the five-year leasing period. This solution is suitable for those who want to continue using the same car but don’t want to buy it out for a lump sum. Leasing companies and banks offer clients with a good payment history an extension of the leasing period or conversion of the residual value of the lease into a car loan.

In the case of a car loan, the interest rate is higher than in the case of a lease contract, but unlike a lease contract, a car loan does not usually come with the obligation of comprehensive insurance. This difference compensates for the higher interest rate on car loans. However, it’s worth considering carefully whether waiving comprehensive insurance is good for the driver. According to the statistics, the most common types of damage covered by comprehensive insurance are breakage of the windscreen of a vehicle, which usually happens when you drive behind someone on the road, and damage in a shopping centre car park when someone accidentally bumps your car with their door. Even the most experienced driver is not immune to these losses.

3. Exchanging the car
At the end of the leasing period, it’s also possible to exchange the car for another one at the same or a new dealer, without any additional payment. The car dealer usually calculates the residual value of the vehicle with a small margin. This means that, as a rule, the market price of the car at the end of the leasing period is higher than the 30% residual value left when the lease contract was signed.

Exchanging your used car for another car at the dealership is a good option for those who don’t want to deal with the sale themselves. All the client has to do is choose a new car, and the old one is sold by the dealer.

4. Selling the car
It’s also possible to sell the leased vehicle before the end of the leasing period. This is particularly worthwhile if you can see that there’s a potential to generate additional income from the sale of the car. It should be kept in mind that it’s usually impossible to obtain additional financing for a new car with an existing leasing commitment. Therefore, if you’re selling the car yourself, you may find that the old car has not yet been sold and leasing for the new car will not be granted until the obligation is repaid.

Although most lease contracts are signed for five years, some clients exchange their car much earlier – three or four years after the vehicle is put into service. This gives you the opportunity to drive a new vehicle all the time without worrying about repair costs.


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