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Depending on the details of your lease contract, you may be able to purchase the car you’re leasing — but is it a good idea?
When your car lease ends, you may have an option to buy out your car lease from your leasing company. If you’ve been saving, you could pay for the lease buyout in cash. Alternatively, you could apply for a lease buyout loan to finance the purchase.
But is buying out your lease the right decision? Each lease buyout situation is unique. Some circumstances make the buyout option attractive, and others could end up costing you. Here are five factors to consider before making a decision.
1. Current market value
One of the first steps you should take is comparing your lease buyout amount — often called the purchase-option price — with your car’s fair market value. In some cases, the purchase-option price will equal the car’s fair market value plus any purchase-option fee. In others, the purchase-option price may be based on the residual value and purchase-option fee. The residual value could be higher or lower than the car’s current fair market value.
If the car is worth less than the purchase-option price, it may not make financial sense to buy the car. Doing so could put you upside down on your car loan unless you make enough of a down payment to cover the difference between the purchase price and your car’s value.
When you signed your car lease, you agreed to a mileage limit. If you go over that limit and plan to turn your car in at the end of your lease, you will likely have to pay a per-mile fee for each extra mile you drove — typically 15 to 25 cents per mile. These charges help cover the additional depreciation that can result from extra miles on the odometer.
You can avoid paying the excess mileage charge by buying out your car lease. If you’re in this situation, carefully weigh the cost of turning in your car and paying these charges against the value of buying the car.
On the other hand, if your mileage is significantly under the limit, that could help the car’s value, possibly to the extent that it’s worth more than purchase-option price.
In this case, it may make sense to buy out the lease, knowing you’re getting a solid deal to keep the car or perhaps even to sell or trade it in for more than you paid for it.
3. Wear and tear
A new car is usually in immaculate condition when you drive it off the lot. But life happens, and cars do deteriorate over time. Maybe a rock flies up and cracks a window, or a drink spills and stains the interior.
Car leases factor in that some wear and tear will happen over the life of the lease. And excess wear and tear lowers the car’s value. That’s why your lease contract likely details extra charges for deterioration that’s beyond typical wear and tear.
If your leased vehicle has excessive wear and tear, these charges can add a hefty cost to your final bill when you turn in your car. As with excess mileage charges, you can usually avoid these fees by buying out the lease rather than turning in the car.
4. Your monthly payments
If you don’t have the cash to buy out your lease outright, you’ll need financing. A monthly payment on a car loan may be higher than monthly lease payments for a couple reasons.
- Lease buyout loans may have higher interest rates than new car loans.
- With a loan, you’re paying for the full remaining value of the car. With a lease, your monthly payments are based on the car’s depreciation over the lease term.
Carefully consider whether you could qualify for a loan and if you could afford the monthly loan payment that would come with a lease buyout.
5. How much you like your car
Even if buying out your car lease makes financial sense, it may not be the right move if your life circumstances have changed or you’re not satisfied with the vehicle.
Maybe you originally leased the car because it had great gas mileage for your long commute. If you moved closer to your office during your lease term, a small car with great gas mileage may no longer be a priority.
Or maybe you simply don’t love the car. Are there little quirks, such as an air conditioner that doesn’t cool the car quickly in the summer heat, that drive you crazy? Are there signs that your car may not be reliable over the long term?
If this is the case, finding a new lease or buying a different vehicle may be a better choice for you.
Ultimately, the decision to buy out your car lease or turn the car in to the dealership will depend on your specific situation and math. In some cases, buying out your car lease makes sense in terms of both finances and lifestyle.
But if your leased car no longer fits your lifestyle or the numbers don’t add up in your favor, turning it in and leasing another car — or buying a new or newer used car — may better suit your finances and needs.