Purchase Your Leased Vehicle? Good Idea or Not?
All consumer car lease contracts provide an option to purchase at the end of the lease.
Purchase price is set by the lease finance company company at the initiation of a lease. Although a car dealer prints the purchase price in the contract you sign, he simply obtains that value either electronically or from a data sheet provided by his lease company. Dealers have no authority to negotiate or change the value.
Lease-end purchase price is generally the same as the vehicle’s residual value, which is a key factor in calculating your monthly payment. It’s the estimated remaining value of a vehicle after the lease has been completed, based on expected depreciation caused by average wear-and-tear and projected mileage.
Another way to look at residual value and lease-end purchase price is that it’s the part of a vehicle’s initial value that has not already been paid for during the time of the lease.
The lease-end purchase price stated in a lease agreement does not change during a lease. It’s part of the legal contract.
Sometimes, lease companies add an extra charge, called a disposition fee or purchase option fee, on top of the stated lease-end purchase option price. This is, in effect, an administration fee and is typically about $350 or more.
Is it a good idea to purchase your vehicle at the end of your lease?
It depends.
Since the residual value in a car lease is always an estimate, the actual value of a vehicle at the end of a lease will almost certainly be different from the estimate. It might be higher than estimated — or lower. The difference might be large; it might be small.
At the end of a lease, a vehicle is considered a used or pre-owned vehicle and its value is determined by market conditions for the same or similar used vehicles in an area. Kelley Blue Book (kbb.com) and other “car value guides” provide used car value data but, in the end, a car is worth only what others are willing to pay.
Why would a car’s lease-end value be different than the estimated value at lease inception?
There are many possible reasons.
First, as we’ve stated previously, lease-end residual value (and purchase price) in a lease contract is simply an educated guess, based on previous history and experience. Such guesses are rarely very accurate.
Next, since most car leases span a term of 3 years, things can happen during that time that affect a vehicle’s future value. Recalls and accident reports, or reports of unreliability, can seriously reduce values. Sales popularity, inventory shortages, and favorable reports from government safety and consumer review organizations can help boost values.
Finally, actual mileage and condition of a vehicle affects its value.
A typical 36 month lease is based on a 30,000 miles allowance, which means the contract residual value is based on expected depreciation for a vehicle of that make/model with 30,000 miles on the odometer, in average undamaged condition. If, for example, your vehicle only has 24,000 miles at the end of your lease, its used-car market value could easily be greater than the estimated value in your contract — since it’s suffered less-than-expected depreciation.
On the other hand, if your vehicle has 40,000 miles and has unrepaired damages, it can be worth significantly less than originally estimated.
So how do I decide to buy, or not?
Whether you decide to buy your leased vehicle at lease-end will almost certainly depend on whether it’s to your financial benefit, although there may be other factors that play into the decision. If you really like the car, know its maintenance history, and feel that it is in better condition than other similar cars on the used car market, you might decide to buy it and keep driving it even if the financial benefit is small or nonexistent.
If your car is worth more than the purchase option price
If you find that your car is worth considerably more than the contract purchase price, meaning you have equity value, you have several possible options:
- Simply return the car to the lease company, knowing that you are giving up equity that belongs to you.
- Attempt to use your equity as trade credit toward the purchase or lease of another vehicle
- Purchase the car and continue to drive it. By purchasing, you may need a used car loan and you’ll have to pay taxes and fees the same as for any other used car purchase.
- Purchase the car and sell it to recover your equity. Again, you must pay taxes and fees prior to selling. The buyer then has to do the same.
If you know you want to sell the car, ask your lease finance company if they allow a third-party purchase, which eliminates double taxation and fees. If allowed, ask your buyer to write two checks: one to you for your equity, and another to the lease company for the contract purchase price.
If your car is worth less than the purchase option price
In this case, which is very common, your best choice is to simply return the car to your lease finance company at lease-end. Otherwise, you would be buying your car for more money than for other similar used cars on the market.
What if I am over my allotted mileage and owe excessive mileage fees?
In this situation, purchasing your vehicle is rarely a good alternative to simply paying the fees — unless you plan on keeping the vehicle for a number of additional years, which mitigates any financial disadvantages of the purchase.