Is it smart to buy your leased car and pay off your lease?
Most auto leases provide the leasing customer with the option to buy their car at the end of the lease, or buy prior to the end of the lease. This is called a “lease buyout.”
To buy out your lease at lease-end simply means you purchase your vehicle from the lease company – either with cash or a loan — for the guaranteed purchase option price specified in your lease contract.
What about an early buyout?
Most lease contracts allow early buyout, but some don’t. Some might 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. No surprises.
Why buy your leased car?
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. Or you may simply like your car and would like to continue driving it for years to come.
Normal and Early Car Lease Buyouts
There are two kinds of car lease buyouts:
1.Lease-end buyout (at normal end of lease)
2.Early buyout (before normal end of lease)
1. 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, but not always, 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 a 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 your lease-end options, including a buyout, and how to determine which option is best 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, receive the title, register the car in your name with your local DMV office, possibly pay sales tax, and you’re done.
In many cases, you can get your buyout loan from the same bank or finance company that handled your lease, although it might not be the best deal. Auto Credit Express is a popular online source of lease buyout loans.
2. Car Lease Early Buyout
If you decide that you want to purchase your vehicle before normal lease-end, this is considered an early lease buyout. It’s more complicated than a lease-end buyout because of the way that the amount of the payoff 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 originally calculated, resulting in crediting most of your past payments to finance charges rather than paying down the lease.
In some cases, it may be cheaper to wait and buy out your lease at lease-end than to purchase early. Some people make the mistake of buying out a lease early when they are over-mileage, thinking it’s a good way to avoid impending excessive mileage charges. However, waiting until lease-end to purchase accomplishes the same thing. Regardless of when you purchase, you avoid mileage charges.
Early lease vehicle buyout is different than early return and termination
Understand that an early purchase buyout is different than an early lease termination in which you want to return your vehicle to the lease company and end your lease early. If you don’t want to actually buy your vehicle from the lease company (early buyout), but want to return your car and cancel your lease early (early termination or payoff), please read our article, How to Get Out of Your Car Lease Early.
For additional information, options, and advice about getting out of a car lease, the Early Lease Termination Guide in our Lease Kit explains the details and how to handle this more complicated situation.
How to finance your lease buyout
“ The interest rate you pay for your lease buyout loan directly depends on your credit score”
To buyout your lease means paying off your lease balance and purchasing your car. You can pay cash or get a conventional used-car loan from a bank or credit union. In some cases, the company that financed your lease will also finance your buyout purchase.
You can also finance your buyout with a loan from an online service such as Auto Credit Express (see banner below) who specialize in loans for people with credit problems. Approval is fast and easy.
Depending on how far along you are with your lease, which affects the buyout price, and how many months you want for your used-car loan — and the loan interest rate — your new payments may be higher or lower than your previous lease payments.
Interest rates for used car loans for buyouts are a bit higher than for new car loans, and depends on your credit score. Know your FICO credit score before you make your decision to buy out your lease. What’s your FICO score? Find out now when you check your credit report for $1 at Experian.com!
Don’t forget insurance
When you finance your lease buyout, you’ll be required to have full-coverage auto insurance. Regardless of what insurance company you used for your lease, you would be wise to shop for better rates. The two auto insurance companies we recommend are:
Liberty Mutual Insurance – A well-respected national company that is know not only for competitive rates but great customer service when you make a claim. They offer a 12 month rate guarantee, a teen discount, and other discounts that are easy to qualify for. People who switched from other companies saved an average of $509.
Esurance – A modern world insurance company, part of the respected Allstate family, offers good rates and makes the process of getting free quotes, purchasing, and making claims as easy as possible. If you are shopping for insurance, don’t miss this great company.
What if you find that a lease-end buyout is not right for you?
If you choose to return your leased vehicle at lease end, which essentially ends your lease obligation except for possible fees, you start all over with another car. You may choose to start another lease, or purchase your next car, new or used. If you decide to purchase, we recommend that you use our Car Deal Finder to find the best current deals, including dealer incentives, on both new and used vehicles. Ask for as many dealer offers as possible to make sure you’re getting the best deal out there in your area.
If you think you want to buy out your car lease, you need to understand your options and how to determine which option is best for your particular situation. An early lease buyout can be expensive and might not accomplish your desired objectives.