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A lease buyout involves purchasing a leased vehicle either at or before the end of the contract. Typically, leases include a purchase price option that is established when the lease is signed.
“The person leasing the vehicle would need to pay the amount of the vehicle’s residual value in addition to any remaining lease payments per the contract, plus sales tax on the purchase and a disposition fee to the dealership,” says Matt Smith, deputy editor at CarGurus, an online vehicle marketplace.
Tips for buying out a lease
If you are considering a lease buyout, first confirm with the lessor or dealer that it is an option. Or you can refer to your monthly leasing statement to find the payoff amount if a lease buyout is permitted.
Once you have, do your homework and understand how factors such as timing, the car’s value and financing will affect the price you pay. These five tips will get you on your way to driving away with the car you want and a good deal.
1. Think about the timing
The question might not be whether to buy your leased car but when to buy it. The purchase’s timing changes the price you will pay.
If you decide to purchase before your lease expires — what’s known as an early buyout — you may have to pay extra fees or finance charges. Check the terms of your lease agreement thoroughly to see how the leasing company handles early buyouts. If there are too many fees, wait until the end of the lease to buy.
“You can often get the best possible deal on the car by waiting until the end of the lease term to purchase the car,” says Sean Pour, co-founder of car-buying service SellMax. “Once the lease is almost up, the dealership will have to think about reselling the car, and they’d rather sell it to you.”
If you decide to buy before the lease is up, make sure the leasing company doesn’t misinterpret your interest in an early buyout as a desire for early termination of the contract. Be clear that you want to get the car, not get rid of it.
2. Assess the car’s value
Research the two types of car values to make sure you get a good buy.
- Retail value: How much you would pay to buy the car from a dealer.
- Wholesale value: How much a dealer would pay to buy the car at auction.
For detailed pricing information, check out sources such as Kelley Blue Book, Cars.com, TrueCar and Edmunds. Have all the relevant information ready when conducting research, including the make, model, trim, model year and current mileage.
“I tend to tell people that looking on sites like Craigslist is a good option because you’ll see what the car is actually selling for in your area,” Pour says.
Next, compare your findings with the car’s residual value in your lease agreement. Typically, leases combine the residual value with a purchase-option fee, if applicable, to estimate how much the leasing company will charge you to purchase the car.
By doing independent research, you can develop an estimate of what you should pay. If your numbers and the leasing company’s are too far apart, you may want to consider returning your lease and simply buying a different used car.
3. Shop around for financing
The leasing company will likely offer to finance the purchase — but don’t say yes until you have explored other financing options. Otherwise, you could pay extra interest because of dealer markups.
You will likely be able to get a better interest rate at a financial institution than with the leasing company or dealership. There are no fees or penalties if you decide not to go with the leasing company.
In addition to lending money for new and pre-owned cars, some lenders offer car lease buyout loans that work like refinancing loans.
“Lenders that offer auto loans typically also typically offer loans for buying out a lease,” says Steve Sexton, CEO of Sexton Advisory Group, a financial services firm. “But the APR on a lease buyout loan is generally higher than on a new car.”
As with any auto loan, the key to getting a good deal is shopping around. Check out lease buyout loans from banks, credit unions and online lenders. This way, the leasing company will have to beat the best deal you found on your own.
This is particularly true if you have a solid credit score, Pour says. “Finance companies will be glad to have you and they’ll even compete on rates.”
4. Let the leasing company make the first move
You may feel like you can’t wait to contact the leasing company to discuss an auto lease buyout, but take a moment to pump the brakes. Making the first move could blow your chances at negotiating favorable terms, according to consumer advocates.
Typically, the leasing company will call about 90 days before the lease is due to expire. If you contact the company before the countdown starts, you may tip your hand about how much you want to buy the car.
Auto lease buyouts are like other types of transactions. You have a small advantage when the seller doesn’t know your level of interest.
5. Try negotiating
Often, companies have a no-negotiations rule for the purchase price of a lease buyout, leaving little opportunity for haggling.
“There isn’t much, if any, negotiating to be done because all the terms are agreed to ahead of time in the lease,” says Benjamin Preston, auto reporter for Consumer Reports.
Still, it can’t hurt to raise the subject. You’ll never know what kind of deal you could get if you don’t ask.
Ask the seller to consider a few concessions, including:
- Waiver of the purchase-option fee
- Purchase incentives
- Financing discounts
Experts point to the purchase-option fee as a sticking point that many sellers are willing to take off the table.
When is it a good idea to buy your leased car?
A lease buyout is a good idea if you are ready to drive a vehicle long term rather than going ahead with a new lease. To determine whether a lease buyout is right, you must ask yourself one major question: Is the vehicle worth buying?
Understanding the car’s residual value is the first step to figuring this out. If your vehicle has a higher value than the buyout amount, it makes sense to purchase. On the other hand, if the value of the vehicle has dropped, avoid a buyout unless you can negotiate a lower number.
To illustrate, assume the car you’re leasing has an appraised value of $15,000, but the lease buyout amount is $18,500. Assuming you kept the car in pristine shape to avoid wear-and-tear fees and didn’t exceed the mileage limit, it wouldn’t be sensible to keep the vehicle. You’ll be paying $3,500 more than it’s worth. In this case, you’ll be better off buying a vehicle that’s worth $15,000 to maximize your dollars.
Another reason some drivers might buy their leased vehicle is to avoid additional fees accrued during the lease. If you exceed your allotted mileage or have tears in the upholstery or dents, the fines might mean a buyout could save you money if you can turn around and sell the car for a profit.
Always calculate the difference between what you’ll pay versus what cars of the same make and model in similar condition are going for in your area before agreeing to a buyout.
The bottom line
Now that you know the basics of a lease buyout, take time to prepare and save money. Be ready to:
- Do your homework on prices and values.
- Shop around for a loan.
- Negotiate price and terms, if possible.
If you have any lingering doubts, you may want to table the idea of buying your leased car.