What is a lease buyout loan?

Woman driving her carImage: Woman driving her car

In a Nutshell

A lease buyout loan is financing for buying the car you leased, if the leasing company allows. Although a lease buyout loan could help you own a car you already know and love, these loans tend to come with higher interest rates than new car loans. And not all lenders offer them, so your options could be limited.
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If you’re in love with your leased vehicle, buying the car at the end of your lease may seem like an appealing option. A lease buyout loan could provide you the financing you need.

But there are some important things to consider before you apply for a lease buyout loan. Depending on the current fair market value of your car at the end of your lease term, or the agreed-upon price in your lease agreement, and what interest rate you may be approved for and what fees are involved, a lease buyout loan could end up being an expensive option.

Let’s take a deeper look at how lease buyout loans work and some steps to take if you decide to get one.

How does a lease buyout loan work?

When your lease is up, your options may include extending your lease, returning the vehicle, re-leasing the car or purchasing it.

Check your paperwork to confirm your options because not all leasing agreements allow you to buy the vehicle after your lease term ends. If yours does, and you want to buy the car but don’t have the cash on hand, you’ll likely need to secure financing with a lease buyout loan.

Before you apply for a lease buyout loan, read your lease agreement to learn what you need to do to buy your leased car. You’ll need to let your leasing company know of your plans to buy ahead of time.

Some banks, credit unions, online lenders and finance companies offer lease buyout loans, which are similar to other types of car loans. If approved, the lease buyout loan will be based on the amount you want to borrow, the annual percentage rate and loan term. Shop around to compare estimates of loan rates and terms so you can find the best loan for your needs.

3 things to consider with a lease buyout loan

Here are some things to know if you’re thinking about applying for a lease buyout loan.

1. Not all lenders offer lease buyout loans

Whether you plan to borrow from a bank, credit union or finance company, remember that the types of loans available, rates and terms vary by lender. When shopping around, check with potential lenders to make sure they offer lease buyout loans because not all do.

2. You could end up upside down on your loan

Understanding your leased vehicle’s current market value is important. You can easily get an estimate of what your car is worth by using free online tools from Edmunds, Kelley Blue Book or NADA. If your car’s current market value is substantially higher than its residual value — plus any fees for purchasing the lease — you might have equity in the vehicle and it may make sense to buy it.

If the situation is reversed — meaning the car’s residual value is higher than its current market value — getting a lease buyout loan could put you at risk of being upside down on your loan. Especially if you don’t make a car down payment and finance the entire cost of the loan buyout, you may be borrowing more than the car is worth.

3. Interest rates are often higher

Leased cars are considered used cars, meaning you might need to secure financing for a used vehicle. Typically, used car loans have higher interest rates than new car loans.

And lease buyout loans offered by some lenders may have higher interest rates than new or used car loans, too.

How to get a lease buyout loan

1. Contact your leasing company

Your leasing company may get in touch with you as the end of your lease term approaches to discuss options, or you can check your lease contract. This can help answer any questions you may have about end-of-lease costs or the car’s residual value and help you understand fees that may be associated with a lease buyout.

2. Shop around

Some lenders offer the ability to apply to get preapproved for a car loan. If you get preapproved, the lender will let you know the estimated amount you can borrow and what your APR and loan term may be. Just remember that preapproval doesn’t mean you’re actually approved for a loan — it only gives you an idea of whether you might be approved and estimates of what your loan terms could be.

When applying for preapproval, be prepared to share some personal information such as your Social Security number, employment and income information as well as details about your vehicle. Remember, applying for preapproval may still be a hard inquiry on your credit, which may lower your credit scores by a few points.

3. If approved, close the loan

If you’ve been approved for your lease buyout loan, it’s time to finalize the paperwork and transfer the title. Talk to your lender and visit your state’s motor vehicles department website to find out the steps to take to transfer the title. Typically, the title will be in your lender’s name until you pay off your lease buyout loan.

Bottom line

It’s important to do your homework before deciding to buy out your leased vehicle and apply for financing. Just know that lease purchase fees and potentially higher interest rates that can come with lease buyout loans could make buying your leased car an expensive choice.

If you’re in love with the car but aren’t sure whether a lease buyout loan is the best option for you, buying a used version of the same make and model could help you avoid lease purchase fees.

About the author: Sarah Archambault is a freelance writer based in New England. She enjoys learning new ways to spend money wisely and helping others figure out how to make smart financial decisions. Sarah is a graduate of the Newhouse… Read more.