As you near the end of your lease, you may wonder, “Should I buy my leased car?” The answer is: it depends. Whether or not you should buy out your lease depends on factors such as the residual value of your vehicle, fees for excessive mileage or wear-and-tear, and your vehicle’s overall condition at trade-in.
This guide answers the question, “Should I buy out my lease?” and similar queries you may have about your lease options. We’ll review a few key reasons to buy out your lease, discuss when you shouldn’t buy your lease, and provide a few tips to help you get the best buyout rate.
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Reasons to Buy a Leased Car
Buying out your lease allows you to swap monthly lease payments for monthly loan payments or no payments at all if you buy out the car with cash. With this option, you own the vehicle at the end of your contract — or even sooner with an early buyout — rather than having to return it to the dealer. Here are a few reasons to consider buying out your lease at the end of the lease period:
Your Buyout Price Is Lower than the Vehicle’s Market Value
If the lease buyout price you’re offered is less than the vehicle’s market value, proceeding with the deal may be worth it. The purchase price of your lease buyout could be lower than its market value if the car has low mileage, it’s in excellent condition, or its market value is higher than when you signed the lease.
Your Lease Will Incur Extra Fees
Most lease agreements allow you an allocated mileage limit. You may incur expensive mileage fees if you exceed the allowance in your lease contract. According to the Federal Reserve, the average number of allocated miles on a lease is between 12,000 and 15,000 per year. If you exceed your mileage limit and incur excess mileage fees, purchasing the vehicle instead of turning it in may be worthwhile. While high-mileage leases are sometimes an option, you’ll usually have to request one before exceeding your allowed mileage.
You Used Minimal Allocated Miles
Although dealers typically charge extra for exceeding mileage limits, they don’t issue a refund for unused miles. Dealers typically calculate current market prices based on several factors, including the number of miles on a vehicle. If you’re way under your mileage limits at the end of your car lease, your vehicle may be worth more than the buyout amount.
You Like Your Car
Some people may become attached to their vehicle and don’t want to surrender it. The lease you chose likely matches the type of vehicle you want with the necessary features. Of course, comparing the vehicle’s residual value with the cost of buying the exact vehicle elsewhere is usually a good idea. Buying out your lease may mean you can avoid shopping on the used car market.
You Maintained the Vehicle Well
Routine maintenance and repairs help maintain the value of a vehicle. If you keep up with timely preventative maintenance tasks and professional cleanings, your vehicle might be worth more than your buyout option. Routine maintenance includes tasks such as oil changes and tire rotations.
The Vehicle Has Excess Wear and Tear
Just as a vehicle in excellent condition may warrant a higher value, a vehicle with excess wear and tear can significantly decrease its value. Many dealerships charge expensive penalties for damages that go beyond general wear and tear. Depending on the condition of your vehicle and the additional fees the dealership charges, it may make sense to buy out your leased vehicle.
When You Shouldn’t Buy a Leased Car
Buying out your lease isn’t always the best decision. Here are a few situations where exploring alternative car buying or leasing options may be best:
The Market Value Is Less than the Buyout Price
High mileage, excess wear and tear, or reduced demand can cause the leased vehicle’s residual value to decline faster than what you owe. If your car’s residual value is lower than the buyout price, buying out your lease may not be a good idea.
You’ll also want to consider any fees the leaseholder charges to determine the total cost when buying out a lease. Common lease buyout costs include a purchase option/buyout fee, title transfer fee, and sales tax. The good thing is you may also save on some fees with a lease buyout. For example, you likely won’t have to pay a disposition fee, which is a fee dealerships charge to pay to clean, repair, and restock leased vehicles.
Your Vehicle Needs Have Changed
Buying out your lease may not be the best option if your vehicle needs have changed since the start of your lease. For example, a smaller sedan may no longer work if you have a growing family. You may also want to consider how your vehicle needs may change in the future to decide if it’s a good buy or not. Buying out your vehicle lease also doesn’t make sense if you no longer need a vehicle.
The Vehicle Requires a Lot of Repairs or Maintenance
Once you buy out your leased vehicle, you’ll likely be responsible for all repairs. Buying out the lease may be expensive if your leased vehicle requires repairs or maintenance. Certain repairs, including electrical or mechanical issues, can be costly to fix, reducing the value of your leased vehicle.
Your Credit or Income Has Changed
If you decide to buy out your lease and don’t pay in full with cash, you’ll have to obtain financing. Your new monthly payments will depend on the vehicle’s buyout cost, the loan term, your credit score, and the down payment amount. If your credit score has changed drastically since you signed the lease, the new finance company may charge you a higher interest rate on your buyout loan, leading to higher monthly payments. However, if your situation has changed, you may also incur higher costs if you lease another vehicle.
Lease Buyout Tips
These lease buyout tips can help you get a good deal:
- Review your lease agreement. Your lease agreement should have information on how the lease buyout works and what costs you’ll incur, including fees and the residual value. Lease buyout options are generally a part of your lease agreement.
- Understand your vehicle’s worth. It’s important to understand the current value of your vehicle so you can determine if the buyout price is worth it. You can look up your car on the Kelley Blue Book website for a local price estimate based on the vehicle’s features, condition, and mileage.
- Compare financing. Your leaseholder may offer to finance, but comparing rates among other lenders is a good idea. Comparing interest rates and financing terms between multiple financial institutions may help you find more favorable terms.
- Time your buyout well. You can buy out your vehicle lease in the middle or at the end of your lease. Initiating a buyout in the middle of the lease is usually more expensive since you’ll have to cover the remaining lease payments, along with the residual value and other fees. However, if you choose to wait until the end of your lease, make sure you give yourself enough time to calculate the residual value of your vehicle, obtain financing, and negotiate with the lender.
- Wait for the leasing company to contact you. Some experts recommend leaseholders wait to discuss a potential buyout clause until the company contacts them. Many leasing companies begin contacting leaseholders 90 days before the end of a lease to discuss buyout options.
- Be ready to negotiate. Negotiating can get you a better lease buyout price and potentially Initiating a buyout in the middle of the lease is usually more expensive since you’ll have to cover the remaining lease payments, along with the residual value and other fees. Compare various lenders, including credit unions, to get the best deal.
- Check your credit before seeking financing. Requesting a copy of your credit report can give you a good idea of your lending options. Interest rates on auto loans directly correlate with your credit score and down payment.
“Should I buy out my lease?” is one of the most common questions leaseholders ask toward the end of their leases. Depending on the value of your vehicle and the asking price, it may make sense to buy out your lease. After leasing a car, you’re already familiar with the vehicle and know it meets your needs. You just need to make sure to compare the pros and cons of a lease buyout to decide if this is the right choice for you.
Finance & Insurance Editor
Ashley Donohoe has written professionally about business and finance since 2010 and has served as an expert reviewer since 2017. Her work has appeared on major websites such as Money.com, The Balance, and the Miami Herald. Having run her own business, she has broad expertise in taxation, financial management, accounting, and investments. Her educational background includes a B.S. in Multidisciplinary Studies, Master of Business Administration, and certifications in accounting and taxation.
Source: www.caranddriver.com