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Lease Buyout: When Does It Make Sense?

Lease Buyout

Lease BuyoutOne of the advantages of leasing is that you can get a new car every few years, but what do you do if you've fallen in love with the vehicle you've leased?

At the end of the lease, you can return the car, start a new lease, or buy a different car. However, if you really like the vehicle, you may want to consider a lease buyout.

Here's what you need to know about lease buyouts and how to get the best deal possible.

What Is a Lease Buyout?

A lease buyout is an option to purchase your leased vehicle. The "buyout price" is noted in your lease contract and will state how much you can purchase the vehicle for by the time the contract is up.

Lease-End Buyout

A lease-end buyout is the most common option, and it means you pay what the car is expected to be worth at the end of the lease period. This price is agreed upon in the lease agreement.

Early Lease Buyout

The early lease buyout allows you to buy the vehicle before the lease is up. Not all lease contracts include this option, and you'll need to review the lease terms.

How a Lease Buyout Works

When the lease ends, you can return it to the dealership or buy it. At the end of the lease, the buyout price is based on the car's residual value or how much value it has left. This price is set at the lease signing and is called the buyout amount.

Cash Lease Buyout

One option for paying for a lease buyout is with cash. You won't face any interest fees, but it can be difficult to save up enough cash for the buyout price.

Finance Lease Buyout

You can also finance a lease buyout with a loan. Many lenders that offer other auto loans may also offer loans for buying out a lease. The dealership may also be able to arrange financing options. Just like any car loan, you'll want to shop around for the best rates and terms.

How to Get a Lease Buyout Loan

While the vehicle's residual value is less than a new car, it can still be tens of thousands of dollars. Many people still need a loan to buy out a lease. Here are the steps for getting a lease buyout loan:

1. Speak With the Leasing Company

Contact your leasing company to find out about the residual value at the end of your lease. Ask about any fees for buying out the lease.

2. Shop for Preapproval

Shop around to find the best lender for you. If possible, apply for preapproval so you can see your estimated approved amount and the APR of your loan term. Make sure to calculate your approximate monthly payment so you can determine if it's feasible for you.

3. Close the Loan

Once you've got preapproval for the best loan, you can close the loan. When you buy out your lease vehicle, finalize the loan paperwork to transfer the title.

When to Consider a Lease Buyout

A lease buyout may make sense if the following apply:

Residual Value is Less Than Market Value

Go back to your contract and find the residual amount. Then, search for the market rate of similar vehicles. A car appraisal tool can help you find the average price for private-party, trade-in, and retail values of your car. If the buyout amount is lower than the average retail price, a lease buyout may make sense.

Excellent Mechanical Condition

By the time you buy out the lease, you may not be under warranty. If the vehicle is in great mechanical condition near the end of your lease, it may be worth buying. Additionally, you can arrange covered repairs while still under warranty before buying out the lease.

Exceeded the Mileage Limit

If you've exceeded the mileage limit or wear and tear guidelines, you may owe a lot in fees at the end of your lease. When you opt for the lease buyout, you won't have to pay the penalties for excess mileage or damage.

Example of a Good Lease Buyout

Imagine that the lease buyout price in your contract was $12,500. If you returned the car to the dealership, you'd have to pay $1,000 in excess mileage fees and $700 in excess wear-and-tear charges. The car is in excellent mechanical condition and currently valued at $13,000.

In this case, it makes sense to purchase it at the end of the lease. You'd save $1,700 in fees and get the car for a little under retail value.

When Not to Consider a Lease Buyout

Here are some times when a lease buyout may not be the best option:

Residual Value is Higher Than Market Value

If your leased vehicle's residual value is higher than the average retail price, the vehicle may not be worth buying. In this case, it may make more sense to return the leased vehicle and shop for the same vehicle at retail price.

Mechanical Issues or Future Repairs

If you've dealt with a wealth of mechanical problems during your lease, it may not be a good car to buy. Additionally, if you didn't need to replace the battery, brakes, or tires during the lease, you will need to during ownership. If the vehicle is in poor mechanical condition or likely to need upcoming repairs soon, it may be better to steer clear.

Monthly Payments Go Up

A buyout may not always fit your budget. When you buy out your lease without a down payment, the monthly payments for a loan could be more expensive than your monthly lease payments. Evaluate the cost of monthly payments to determine if they fit your budget.

Example of a Bad Lease Buyout

Now, imagine that the lease buyout price is $12,500. You would not incur any extra mileage or wear-and-tear charges upon returning. The car is in good condition, but its market value is only $9,500 in its current condition.

If you absolutely love the car, you'd be better buying a car in a similar condition elsewhere. By completing the buyout, you'd be paying more for the same vehicle.

Lease Buyout Fees

While buying out your lease can help you save on excess mileage or wear-and-tear fees, you will not escape all fees. Buying out a lease also comes with fees like the purchase option charge. Typically, this fee is a few hundred dollars, but it will be outlined in your lease.

The Bottom Line for Buying a Leased Car

If you fall in love with a car you are leasing, a buyout option may be the ideal way to transition to ownership. When determining if it makes sense to buy the leased car, you should consider the cost vs. the average market value, monthly payments if you must finance, and the car's condition.

Frequently Asked Questions

What is a lease buyout?

A lease buyout is when you choose to buy the car at the end of the lease for the residual value outlined in your lease agreement.

Should I buy my car at the end of a lease?

You should consider buying a car at the end of the lease if:

  • The residual value you pay is less than the average market value of the car.
  • The vehicle is in good mechanical condition and will not require major repairs soon.
  • You exceeded the mileage limit or caused excessive wear-and-tear. The fees for those can be quite high.
  • You love the vehicle and plan to keep it for a long time.
  • You can buy the car in cash or if the monthly payments for a loan fit your budget.

How does a lease buyout work?

Car leases often include a purchase option at the time of the initial agreement. If you decide to buy the car at the end of the lease, you can buy it in cash or via a loan. You will have to pay a purchase option charge.

What are the fees for buying out a lease?

When buying out a lease, you'll need to pay the purchase option charge. This charge is often a few hundred dollars, but it will be stated in your lease agreement.

Can you buy out a leased vehicle?

You can often buy a vehicle at the end of the lease for the agreed-upon residual value of the vehicle. In some cases, you may also be able to buy the vehicle during the lease.

Can I negotiate the buyout price of a lease car?

The price to buy out a leased car is determined when the lease is made. You may be able to negotiate the price when the lease is drafted, but you may not be able to negotiate the price at the time of the purchase option.