When you lease a car, you make monthly payments to offset the depreciation of the vehicle while you use it. Lease terms specify how many miles you can drive each year and prohibit excessive wear and tear to help ensure minimal loss of value. Though you don’t own a leased vehicle initially, it’s usually possible to purchase it later.
It’s easiest to purchase your leased vehicle at the end of the lease term. Can you buy out a lease early? Sometimes this is possible, but it’s not always in your best interests. You should consider several important factors before you take this route to keep your finances in the best shape possible.
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Understanding Your Car Lease Terms
When you lease a car, you sign a detailed contract that includes all the information you need to buy out your lease. If you didn’t have a lease buyout in mind at the time, you may not have examined these details closely. Review your lease contract now to determine exactly where you stand.
Your lease agreement specifies:
- Lease term: This is the length of time that you’re expected to make monthly payments on the vehicle. Most car leases last for 36 months, though you can also find some 24-month options.
- Amount due at signing: Your deposit, fees, and rebates are applied.
- Monthly payment: This is the amount you’re responsible for paying each month for the duration of the lease.
- Mileage cap: This refers to the number of miles you can drive each year. This typically falls between 10,000 and 15,000 miles.
- Buyout price: This is the price you will pay to buy out the lease at the end of the term.
- Early termination fee: This is a fee applied for early termination of the lease.
After reviewing these details, you’ll understand how long you’re expected to pay for your vehicle and how much you need to purchase it outright at the end of your lease. If you can’t wait until the end of your lease, you’ll need to check your contract for buyout options that let you purchase the vehicle sooner. Some leases do allow for this, but you can expect to pay an additional charge.
If you want out of the lease but don’t want to purchase the vehicle, you can review the early termination fee to see where you stand. This is rarely your best option, as you may have to make all your remaining lease payments to fulfill your contract.
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Calculating Your Buyout Costs
If you want to buy out your lease, you’ll have to pay the vehicle’s residual value, as specified in your lease contract. Your payments only cover the vehicle’s depreciation over your lease term. To buy out the car, you must cover the full estimated value of the vehicle.
The residual value is expressed as a percentage. For example, if the vehicle had an MSRP of $40,000 when you leased it and the residual value is 50%, you’ll have to pay $20,000 at the end of the lease term to purchase the vehicle.
Can you buy out a lease early for the same price? Unfortunately, the answer is no. If you’re trying to buy out your vehicle lease before the contract is up, you must make all remaining payments required on the lease along with the residual value of the car. You may face an early termination fee as well if you make this move too soon.
In some cases, the residual value specified in the lease will be less than what your car is worth at the end of the term. This is referred to as lease equity. You may have lease equity if:
- You kept the car in excellent condition throughout the lease term, and it acquired less than average wear and tear.
- You drove fewer miles than anticipated during the lease.
- There is higher-than-expected market demand for your vehicle.
Timing Your Car Lease Buyout
It’s best to wait to buy out your lease at the end of the term. If you plan to keep the vehicle, you don’t have much to gain by buying out the lease early versus at the end of the term. In fact, you’ll usually pay much more.
Even if you don’t have to pay an early termination fee, you’ll still have to settle all your upcoming lease payments to close out the lease. You will be responsible for paying these on top of the remaining value of the car.
If you contact your leaseholder anxious to purchase the lease, they’re less likely to negotiate with you on the associated costs. While the residual value of the vehicle is usually non-negotiable, there are other fees, such as administrative charges, that you may be able to negotiate. You’ll have more bargaining power if you wait until the lease is up and let your leaseholder contact you about a buyout option rather than the other way around.
When a Lease Buyout Saves You Money
In most situations, individuals choose to buy out a lease because they want to keep the vehicle. However, if you’re thinking of buying out your lease early, you may be facing a difficult financial situation that has you reexamining your monthly payments and other commitments.
Buying out a lease early rarely saves money. But if you can make it to the end of the lease term, there are many situations where you may find that buying out the lease is better than simply concluding the contract. You will pay extra fees at the end of your lease contract if:
- You’ve driven more than the specified number of miles.
- You did not keep up with the required maintenance.
- The vehicle sustained excessive wear and tear, including cosmetic damage.
- You’ve customized the vehicle by making changes prohibited by the lease agreement.
Rather than pay these additional charges, you may choose to buy out the lease. You can then decide whether you’d rather keep the car or try to sell it for a comparable price.
Alternatives to Buying Out Your Lease Early
There are few reasons to buy out a car lease early if you intend to keep the vehicle. In most instances, you would only make this move if you wanted to get rid of the vehicle and drive something else. In this case, you may want to consider some other options that are more financially viable.
If you’re planning to lease your next vehicle, inquire about rolling your remaining lease payments into your new lease. This will keep you from paying one big lump sum to pay off the lease at once. Instead, you’ll have higher monthly payments for your new leased vehicle, as you essentially pay for both at the same time.
Another possibility is transferring the lease. Check your contract to find out if this is an option. Some leasing companies will allow you to transfer your lease to a new individual, provided you can find someone to take over the payments. If you’re in a difficult financial situation, you may have a family member or close friend willing to take over your lease.
While you can buy out a car lease early, this isn’t always the best option. Consider all the ramifications of this choice so you can decide exactly if, when, and how to end your car lease. Tackling this task right will help you save money in the long term.
Finance Editor
Jim Slavik is a financial services expert with 30 years of strategic and operational experience including leading underwriting, loan administration, customer service and collections. He has held C-suite credit operations roles for Fortune 100 and private equity companies for credit cards, personal loans, lease-to-own, auto loans, mortgages, and insurance for prime and sub-prime borrowers.
Currently Mr. Slavik is an independent financial services consultant for private equity firms and a contributor for expert networks such as GLG, Guidepoint, and Level company amongst others.
Source: www.caranddriver.com