Leasing a car may seem like a sound financial decision – until it’s time to return the car! If you’d rather own the car you’re driving, you can buy out a car lease or refinance it easily. In this post, we’ve broken down everything you need to know about car lease buyouts.
Not everyone likes to own a car – some of us would much rather lease one out every few years. However, there comes a point just before the return date when you start thinking “I enjoy driving this car. Should I buy out this lease instead of returning it?” Don’t worry – you’re not the first person to consider a lease buyout!
But before you do, there are some essential things to know about the process of buying out a lease. Here’s what you should keep in mind.
What is a lease buyout?
A lease buyout – also called a purchase option – is a clause written into your lease agreement that lets you buy the car at the end of the lease period. Simply put, a lease buyout allows you to become the car owner at the end of the lease period. The buyout amount is based on the car’s residual value (the anticipated value of the car at the end of the lease after accounting for wear and tear, depreciation, and mileage).
Typically, the purchase option and buyout amount will be mentioned in the lease agreement when you first sign it.
Also read: What is the difference between an auto loan and an auto lease?
How does a lease buyout work?
All lease dealerships will mention a buyout price and the methodology for arriving at it when you are signing the agreement. When the return date of the lease is approaching, the lessor or dealership will get in touch with you to discuss buyout options. If you don’t want to exercise the option, you can always return the car to the dealership. But before you buy the car, make sure it makes financial sense.
An example of a good lease buyout
Imagine that the lease buyout price listed in your agreement is $15,000, and you have already exceeded the mileage limit. If you choose to return the car to the dealership, you might have to pay $1500 in excess mileage fees and $700 in wear-and-tear fees.
But if the car is in good condition and its current market value is indeed $15,000, it makes better sense to buy it and save yourself the $2200 in excess fees. Plus, you get the added advantage of owning a car you love!
An example of a bad lease buyout
On the other hand, let’s imagine another situation in which the buyout price is $15,000, you have no excess fees, but the current market value of the car is only $10,000. It doesn’t make sense to buy the car because even without the excess fees you will be overpaying by $5000! If you really like the car so much, you could even get a used car for $10,000 at a used car dealership – but a lease buyout will be a bad idea.
The next question you may have is – “What if I don’t have the money to pay for a lease buyout?”
How much does a lease buyout cost?
It depends on things like how much your car is worth. Check your lease contract to find out what the car is expected to be worth at the end of the lease. This is called the “residual value.” You’ll have to pay the dealer minimum to get the car. Then, count how many payments you still have left on your lease. If you are in the middle of your lease, you will pay those payments on top of the residual value. You’ll also have to pay the sales tax that your state needs.
When you want to get out of your lease early, your dealership might charge you a fee. But dealerships often charge fees to clean and prepare your car for resale when you return it at the end of the lease. So, you won’t have to pay for them if you buy them. To sum up, add up the following costs to find out how much it will cost to buy out the lease:
- How much is the car worth (found in your original leasing agreement)
- The remainder of the lease payments
- Your state’s sales tax
- The fees to the dealer
How can you pay for a lease buyout?
Let’s face it – some of us may not have $15,000 in ready cash to cover the buyout price. However, you can choose many financing options to make things easier.
Banks, credit unions, and other lenders offer lease buyout loans that offer you attractive deals. Alternatively, you can also refinance the car lease – which means you take out a loan to buy the car and then pay affordable monthly installments on the car loan for a certain period.
Whichever option you choose, always remember to shop around for offers from multiple lenders. That way, you needn’t settle for the first loan offer you get and can choose one with an affordable APR.
When should you buy out a car lease?
There are broadly four considerations for when to buy out a car lease:
- Exceeding mileage limits: If you’ve exceeded the stipulated mileage limits in your lease agreement, you may have to pay extra fees for every mile driven. It may be more convenient to purchase the car outright rather than pay high fees.
- Future cost of maintenance: Certain makes and models of cars have very low maintenance charges, which means you can save more in the long run. Rather than pay for lease maintenance, buy out the car and enjoy savings yourself!
- Condition of the car: All vehicles depreciate over time due to wear and tear over the course of their lifetime. However, you’ll find that dealerships charge high fees for more-than-regular wear and tear – sometimes into the thousands. Buy out the lease if you think it’s not worth the fees!
- Ability to finance the buyout: Do you have enough cash to pay off the lease upfront? Or do you plan to finance it through other means, like refinancing? Choose a lease buyout only if you’re clear about these options.
You can do a fair appraisal of the car’s value through sites like Kelly Blue Book and Edmunds’ True Cost to Own.
How do I calculate my lease buyout amount?
An estimated ‘lease buyout amount’ or ‘purchase option price’ will be mentioned in your lease agreement, calculated according to the dealership’s methodology. However, you can also do your own calculations to see if their amount is justified. You can do so by adding:
- The residual value of the car
- Total remaining payment (if any)
- Estimated car purchase fees (title fees, taxes, etc)
How to buy out your car lease: Step-By-Step
Step 1: Keep an eye out for when your lease ends. Check the lease agreement for the mileage limit to see if you have exceeded them.
Step 2: Let the lessor make the first move by calling you up to discuss buyout options.
Step 3: Use resources like KBB and Edmund’s to get a fair appraisal of the leased car’s current value. If it’s affordable, you can decide to go ahead with the buyout.
Step 4: Shop around for financing options. Besides banks and dealerships, you can also use online refinance platforms like Way.com to compare different rates and offers.
Step 5: Once you choose an offer and are approved for a lease buyout loan, you’ll have to finalize the paperwork and transfer the title to your lender’s name. It will remain so until you pay off the loan in monthly installments.
Also read: How to refinance a car lease: A complete guide
Tips for negotiating a lease buyout
Most dealerships don’t have much wiggle room regarding the lease buyout price, but sometimes you can get a better price to buy your leased car. If you can negotiate the price to buy out your lease, it might help to make a strong case. Here are some tips to help you negotiate a lease buyout with the dealership:
Know your contract thoroughly
Find out who wrote the contract before you try to talk about the buyout price. Most car leases are handled by car companies’ finance departments, also called “captive lenders.” Most of the time, captive lenders don’t negotiate.
If your lease was written by a captive lender, that’s probably the only price you can buy the car for. If your lease was written by a third-party lender, like a bank, you might have better luck. Depending on how they do business, these lenders may be more willing to talk.
Don’t skip the research
Find out how much your car is worth before you ask your dealer to buy it back. Find out how much your car is worth on the market. If the current market value is less than the purchase price on your lease, that could be good for you.
With this information, you can try to get a lower price for the buyout. Remember that lenders willing to negotiate might not care about your reasons and just give you the best deal they can based on their policies. Still, it can be a good idea to come up with objective proof to support your request.
Negotiate the fees
If you can’t get a better price on the buyout, you might be able to save money by asking for the fees to be eliminated or lowered. Dealerships might be able to work with you on things like transaction or document fees.
When you want to sell the car for a profit, you should ask the dealer to lower their fee. Ask for a detailed list of all the fees that are part of your buyout. The only fees you can’t change are the ones that are written in your lease. You may be able to give in on some things.
Is it worth it to do a lease buyout?
It depends on various factors – like the make and model of your leased car, the current condition, the level of depreciation, and more. However, if you want to follow a general rule, it’s always worth doing a lease buyout if the purchase option is equal to or less than the current resale value.
Benefits of a lease buyout
- No need to waste time shopping for a new car
- You can save money if the buyout price is lower than the current resale price
- You don’t have to pay for any wear-and-tear charges or mileage limits
- You’re already familiar and comfortable with the car – and you get to own it now!
Drawbacks of a lease buyout
- You might be overpaying if the buyout amount is higher than the current resale price
- Too many miles on the car or depreciation might rapidly reduce the car’s value in future
- If you don’t shop around and compare different APRs for the car loan, you could end up with high monthly payments
FAQs on car lease buyout
Can you buy out a lease early?
Yes, you can choose an early buyout if you feel that makes financial sense. However, check the lease agreement to see if it is allowed and if there are termination penalties or charges involved. If there are too many charges for terminating early, it’s best to wait until the end of the lease period.
What happens when your car lease is up?
When your car lease is up, typically you have two options:
- Return the lease and take another one if required
- Buy out the lease (purchase the car) and become the owner if you feel the buyout amount is justified
Does ending a car lease early affect your credit?
As long as you pay all the termination fees and don’t have any pending payments, early termination of a car lease or lease buyout will not affect your credit score. If you choose auto refinancing to help buy the lease, there might be a slight drop in your credit score when you first apply. However, you can easily make it through consistent payments.
Is it wise to buyout a leased car?
Depends. If the value of your car on the market is higher than the buyback value (including any fees), it might be a good idea to buy out the lease.
Can you negotiate the buyout price of a leased car?
Yes, you can, but you should ensure it fits your budget. But you can’t bargain over the lease payoff price if you decide to buy the car later. Even though an estimated buyout price is mentioned in the lease agreement, it is possible to negotiate the amount.
Why are people buying out their leases?
When compared to the value of the inventory on dealer lots, buyout prices are a good deal. Used car prices are rising, so the buyout price could be less than what the car is worth on the market. Because of how much they are worth on the market, leased cars are almost as good of an investment as bought cars. You can buy yourself out of your lease and then sell it.
What do I need to know before buying out a car lease?
Buying out a car lease, you should be aware of the following:
- The current car worth
- The history of how the car works.
- Whether you’ll have to pay extra for going over your mileage limit.
- Whether you’ll have to pay for repairs or extra wear and tear.
- Whether or not you can get a loan and pay the monthly payments.
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