In a Nutshell
When your car lease is up, you may need to decide whether to return the car or do a lease buyout and purchase the vehicle. The decision that makes sense for you depends on your budget, the car’s price and whether you really want the car.If you’re considering a lease buyout, you have some thinking — and math — to do before making your decision.
Depending on your contract, you may be able to purchase your leased car for the buyout price — which should be noted in your contract — by the time or before the contract is up. Just like when buying a used car, you can usually finance the transaction or pay cash. But how do you know when a lease buyout makes sense?
Doing a bit of research and running the numbers can help you make a more informed decision. Here are some things to know about lease buyouts.
How a lease buyout works
If a buyout option was part of your lease agreement, you typically have the option to buy your leased vehicle at the end of your lease. The alternative is to return the car to the dealership.
If you opt for a lease buyout when your lease is up, the price will be based on the car’s residual value — the purchase amount set at lease signing, based on the predicted value of the vehicle at the end of the lease. This amount may also be called the buyout amount or purchase option price.
When you reach the end of the lease, you can decide whether to take an available buyout option or return the car to the dealer. If you decide to use the buyout option, you pay the set amount plus any additional fees.
How to pay for a lease buyout
Choosing a lease buyout option may be expensive. When you get the option to buy a leased car the vehicle is typically just a few years old and its residual value can be pretty high.
While you can pay the lease buyout amount with cash, there are financing options out there should you need it.
Thankfully, you can apply for a lease buyout loan to finance the transaction. Some lenders that offer auto loans for new or used cars also offer loans you can use to buy out a lease. The dealership may be able to arrange financing for you, as well. But make sure you shop around to find the best rates and terms for your situation.
Image: aaupdatebuyleaseWhat to consider before buying out your lease
If you love your car, buying out the lease may seem attractive. That said, it may not make financial sense if the numbers don’t work out.
When deciding whether to buy out your lease, you should consider a number of factors to determine if it’s a sound financial move.
- The value of the car in its current condition
- The mechanical history of the car
- Whether you’ll have to pay excess mileage charges
- Whether you’ll have to pay reconditioning or excess wear-and-tear charges
- Whether you can line up financing and afford the monthly payments
FAST FACTS
How to consider wear-and-tear or excess mileage charges when thinking of a lease buyout
Wear-and-tear and mileage can impact the actual value of the car at the end of a lease. You typically have to pay fees for excess wear-and-tear, unless you opted into the excess wear-and-tear insurance offered by some dealers. But mileage overage and excess wear-and-tear charges can be costly, and may sway you toward a lease buyout to avoid the fees if you’re already thinking about buying the car.
An example of a good lease buyout
Let’s say, for example, the lease buyout price listed in your contract is $14,500, and you would have to pay $1,250 in excess mileage fees and $850 in excess wear-and-tear charges if you return the car to the dealership. But the car is in great mechanical condition and is currently valued at $14,500 just as predicted, even after considering the excess mileage and wear-and-tear. And you love the car and you’d be able to easily finance the buyout with affordable payments.
In this example, it may make sense for you to purchase the car. By doing so, you’d avoid paying $2,100 in fees you’d have to pay by turning in the car.
An example of a bad lease buyout
Let’s take a look at another example, where the lease buyout price is the same at $14,500 but for a different type of car. You followed the lease terms exactly and had no excess mileage charges or excess wear-and-tear. While the car is in excellent condition, its appraised value is only $10,000 in its current condition.
Even if you love the car, taking advantage of a lease buyout in this situation may not be ideal because you could likely buy a similar car in a similar condition for $10,000 elsewhere. If you did complete the buyout, you’d be paying a $4,500 premium to keep your exact car.
Bottom line
Depending on your situation, a lease buyout could make sense for you. Or you may want to turn it in and lease a new car. Running the numbers with our auto loan calculator could help you decide.
Don’t forget to compare buying a used car to your lease buyout price to see if you can get a better deal on a similar used vehicle elsewhere. While you won’t have the comfort of knowing the vehicle’s past like you would with a lease buyout, you may be able to save some money.