Car Lease Buyout - Smart Option or Not ?

Most auto leases provide the leasing customer with the option to buy their car at the end of the lease, or prior to the end of the lease. This is called a "lease buyout" or "lease payoff."

To buy out your lease simply means you purchase your vehicle from the lease company – either with cash or a loan.

Most lease contracts allow early buyouts, but some don't. Some restrict the time period during the lease in which you may exercise your purchase option. For example, buyouts may be prohibited in the first few months and/or the last few months. You should read your lease contract to determine if you have any such restrictions.

You might consider a buyout if you want to continue driving your car after your lease ends. Since you know the car's history and know its condition, it makes a great used car purchase without the uncertainties of buying a car from a dealer or stranger. You know the car, how it's been treated, and its condition.

If you've exceeded your mileage limits, or have excessive wear or damages, and want to avoid associated penalties, you may want to consider a buyout.

There are two kinds of car lease buyouts:

1. Lease-end buyout (at normal end of lease)
2. Early buyout (before lease ends)

Car Lease Lease-End Buyout
Buying your vehicle at the end of your lease is sometimes a good option, and sometimes not, depending on the details of your particular situation. This option should always be considered and compared to your other lease-end options to determine if it's your best move.

The end-of-lease buyout purchase price is typically the residual value stated in your lease contract. This price is often negotiable, and sometimes not, depending on the lease company's policies. If the company won't negotiate, you must decide if the stated price is a fair price to pay.

There are a number of different ways to look at the buyout purchase price and whether it's a fair price to pay:

1) When leasing, you pay for the car's depreciation. The remainder is the residual, which is the same as your lease-end purchase price. So, by buying the car for the residual value, you're simply paying for the part of the car' s original price that you haven't already paid. It's a fair price in this respect. Nobody gets cheated.

2) However, another way to look at the price is from a market value viewpoint. If you had to buy another car (used), from an individual or dealer, just like the one you've been leasing, with the same equipment and mileage, what would you have to pay? This would be a fair price to you if you bought your leased car from the lease company, although it might not be quite fair to the lease company if your residual had been set high (and you benefited by making low payments).

3) Finally, another way to look at it. If you were to return your car to the lease company, they would only expect to get wholesale price (think trade-in value) by selling it at a dealer auction. In this respect, any price you offer them that is more than wholesale is fair to them, and a good deal for you.

Having said the above, be aware that many lease companies have "residual insurance" that makes up the difference between wholesale auction price and contract residual value. So, they have no reason to want to negotiate with you on the purchase price since they'll get the full price anyway. There's no way for us consumers to know, however, whether or not the lease company has the insurance. They'll either negotiate with you or they won't.

Much more detail on how to handle lease buyouts can be found in a special section our Lease Kit, the Lease-End Advisor, which contains a complete discussion of all lease-end options, including a buyout, and how to determine which is the best option for your particular situation.

Financing a leased-car purchase is the same as financing any used car purchase. You arrange for a used-car loan, get a check written to the lease company for the amount of the purchase, possibly pay sales tax, and you're done. The loan company usually holds the title until you've paid off your loan.

Look at online loan sources such as up2drive.com for fast and easy approval.

Car Lease Early Buyout
If you decide that you want to purchase your vehicle before lease-end, this is considered an early buyout. It's more complicated than a lease-end buyout because of the way that the price of the vehicle is determined. The price is a combination of the lease-end residual value, as stated in your lease contract, added to the amount you still owe on your lease.

The amount you still owe on your lease may be considerably higher than you might think. It's because your low monthly lease payments have not kept up with the rapid depreciation in your vehicle's value. It's also because your lease company recalculates your lease balance in a different way than it was originally calculated, resulting in crediting most of your payments to finance charges rather than paying down the lease.

It's nearly always better to wait and buy out a lease at lease-end than to buy out early. Some people make the mistake of buying out a lease early when they are over mileage. In most cases, it is cheaper to pay mileage fees at lease-end than to buy out a lease early.

Understand that an early buyout is different than an early termination in which you want to return your vehicle to the lease company and end your lease early. The Early Termination Guide in our Lease Kit explains the details and how to handle an early lease termination.

For more, see LeaseGuide.com