Lease buyout: 5 tips on buying your leased car

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Leasing a car comes with a variety of benefits, including a minimal down payment and typically lower monthly car payments than buying a car. As a bonus, you get to drive a shiny new car every few years when the leases expire.

Eventually, however, it may make more sense financially to eliminate the never-ending car payments and buy a vehicle that you’ll pay off and own outright. One way to do this is to purchase the vehicle from the leasing company through what’s known as a lease buyout. Here’s everything you need to know about an auto lease buyout and the negotiating tactics that can help you get the best deal possible.

What is a lease buyout and how does it work?

A lease buyout involves purchasing a leased vehicle either at the end of the contract or at some point before the lease was originally set to end. Most car leases include these options, allowing the vehicle to be purchased from the leasing company.

Typically, leases include a purchase price option that was established when the lease was signed. This figure is known as the car’s residual value and is based on what the company estimates the car will be worth at the end of the lease.

“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.

If you are hoping to purchase your leased vehicle, first confirm that this is actually an option. Once you’ve determined this to be the case, you can purchase the vehicle with either cash or an auto loan in the same way you would purchase any other vehicle.

“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.”

Tips for buying out a lease

If you are considering a lease buyout, do your homework first and understand how factors such as timing, the car’s value and financing will impact the price you pay. Here are some tips to help you land the most competitive purchase agreement possible.

1. Think about the timing of the lease

In some cases, the question might not be how to buy your leased car so much as when to buy it, as the timing of the purchase impacts the price you’ll pay.

If you decide to purchase before your lease expires — what’s known as early buyout — you may be required 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 too many fees come into play, you might find it easier financially to wait until the end of the lease.

“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 nearing its end, 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

As you make a plan for how to buy your leased car, you’ll need to do some research on two types of car value:

  1. Retail value: How much you would pay to buy the car from a dealer.
  2. 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 make, model and 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, which is the estimate of how much the car will be worth at the end of the lease, stated 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 some independent research, you can develop your own estimate of what you should pay. If your numbers and the leasing company’s numbers are too far apart, you may want to give this decision more thought.

3. Shop around for financing

The leasing company will likely want you to finance the purchase through it to squeeze out some extra profit with a markup. Don’t say yes until you’ve explored other financing options. You may be able to get a better interest rate at your own financial institution than with the leasing company or dealership, says Nathan McAlpine, founder and CEO of auto broker CarMate, and 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.

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 that countdown starts, you may tip your hand about how much you’d like to buy the car.

In this way, an auto lease buyout is like many other types of transactions. When the seller doesn’t know your level of interest, you have a bit of an advantage.

5. Try some talking points

Often, companies have a no-negotiations rule when it comes to the purchase price on a lease buyout, leaving little opportunity for haggling to get a better deal.

“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. After all, you’ll never know what kind of deal you could get if you don’t even ask. There’s no harm in asking the seller to think about making 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.

The bottom line

Now that you know the basics of how to buy your leased car and save money, take some time to reaffirm your commitment. Be certain that you’re 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, buying your leased car may not be the right move at this point in time.

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Written by
Barry Bridges
Senior credit cards editor
Senior Editor Barry Bridges has been writing about credit cards, personal loans, mortgages and other personal finance products since 2017. Before joining Bankrate, he was an award-winning newspaper journalist in his native North Carolina. Send your questions about credit cards (and fantasy baseball) to bbridges@bankrate.com.
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