Buying a leased car
One of the key benefits of leasing a car is that you can return it to the dealer and walk away when your lease is up. But most lease contracts do have a buyout option that allows you to purchase the vehicle at the end of the lease, or sometimes even sooner. Deciding to buy out your lease depends on factors like the car's value and condition, its buyback amount, the car's mileage, and your personal preferences.
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Should you buy your leased car?
To help decide if you should buy out your leased car, you should consider the car's value and buyout amount, mileage, condition, and what you want in a vehicle. Some reasons for buying your leased car include:
- You're already familiar with the car: You know the car's history, how you've maintained it, and any mechanical issues it might have. If you love the car and have taken good care of it while you were leasing it, buying out your leased car can be a way to get a well-maintained vehicle you already know you like for a reasonable price.
- No car shopping hassle: Avoid the time and effort to research and test drive another used car.
- No immediate depreciation: Unlike buying a new car, a lease buyout's value won't depreciate the moment you drive it off the lot.
- Condition of the vehicle: If you've taken good care of the car and it's in excellent condition, it might be a safer option than dealing with another unknown used car.
Reasons not to buy your leased car
Ideally, for it to be worthwhile to buy out a car lease, the buyout price would be lower than or close to the vehicle's market value. However, if the buyout price is higher than the market value, it may not be a smart financial decision to do a lease buyout. Consider these downsides of buying a leased car:
- Potentially higher cost: If the buyout price is higher than the market value, a lease buyout generally doesn't make sense.
- Excess miles: Many lease agreements limit the miles you can put on the car during the lease term. If you exceed the mileage limit, you'll likely have to pay a fee — typically $0.15 to $0.30 per mile. Depending on the fee total and the car's residual value, you might prefer to buy out the lease and own the car rather than pay the excess mileage fee and return the car to the dealer.
- Wear and tear: Leasing companies want you to return a leased car in like-new condition. If yours isn't, you may have to pay an excess wear-and-tear fee to fix car dents or scratches. You might decide that you'd rather buy your leased car than pay the damage expenses.
- Financing costs: If you need to finance the lease buyout, you'll pay interest along with dealer and lender fees and sales tax.
What's the process for buying a leased car?
The basic process may include these steps:
Talk to your lessor and find out if your lease agreement allows for a buyout
Let the lessor know you're considering a lease buyout. You might try to negotiate the purchase option fee or ask for other incentives. The lessor may also be able to discuss your options if a buyout isn't part of your lease agreement.
Determine the value of the car
When you sign a lease contract, the leasing company estimates how much the vehicle will be worth when the lease ends. That amount is known as the residual value or buyback amount. That's how much you'll have to pay (plus applicable taxes, fees, and remaining lease payments) if you decide to buy out your car lease.
If the leasing company's estimate is inaccurate, your car could be worth more or less than the contract's buyback amount. You can get an estimate of the car's current value from sources like the National Automotive Dealers Association (NADA), Kelley Blue Book, and Edmunds, or bring it to another dealer to estimate its resale value.
Evaluate the cost of the buyout
Once you know a lease buyout is an option, you can calculate the numbers to determine whether it would be a good purchase. Compare the car's current value to the buyback amount to help you decide if buying your leased car makes financial sense.
Choose between monthly loan payments or cash purchase
If you need to borrow money, some lenders may finance your car for you if its value exceeds its purchase price. It helps to compare options from multiple lenders and look for a loan with a low interest rate that can save you money.
Can you buy out your lease early?
Yes, if your lease agreement lets you buy out your lease before the lease ends. This could be useful if you go over their mileage limit on a leased car, as you may be charged a per-mile fee for every mile over your limit. If you really like your car and want to keep driving it, an early buyout may be a good option for you.
Can you negotiate the buyout price of a leased car?
If your lease contract allows for negotiation, you can do so. You may want to negotiate with the dealer if the residual value in the contract is higher than the vehicle's current market value.
How is a lease buyout calculated?
If you are doing a lease buyout at the end of the lease, you'll pay the residual value plus taxes and fees or finance the purchase with a loan.
Begin by consulting your lease agreement to ensure that it allows for a buyout option at the end of the lease. Here's a guide you can use to estimate how much it might cost to buy out your lease:
- Residual value: You can find this number in your lease contract, and it represents the value of the car at the end of the lease.
- Purchase option fee: Some lease agreements include a purchase option fee if you decide to buy the car when the lease ends, and it will be listed in your contract.
- Current value of the car: Find an estimate of the vehicle's current market value using the tools mentioned earlier.
- Calculate taxes and fees: You'll pay registration, license, and any other fees and sales tax. You can consult your state's motor vehicles department for more details.
To calculate the buyout amount, add the residual value to any remaining fees, taxes and outstanding charges, and the purchase option fee. If the market value of your leased vehicle is higher than the residual value in the contract, you have some equity to work with. You can buy out the lease and get the car for a good price.
Do lease payments go towards purchase?
No. When you lease a car, the payments only cover the cost of car depreciation — not the vehicle's purchase price — during the term of the lease. If you decide to buy out your lease and don't have the cash to pay for the car, your loan payments will likely be higher than your monthly lease payments. Estimate your payments using this lease vs. buy car calculator.
How does insurance work when you buy your leased car?
Whether you buy a leased car outright or finance it with a loan, it shouldn't impact the cost of your policy. You need to follow the coverage requirements of your lender if you take out a loan to buy the car. Usually, you need to purchase both collision and comprehensive coverage in addition to your state minimums. Once you repay an auto loan, you can drop comprehensive and collision coverage if you want to save money on insurance.
Once you become the vehicle owner, you'll be responsible for all maintenance and repairs. Since many bumper-to-bumper warranties last for several years, the vehicle's warranty may be ending around the time you purchase the car. Consider a vehicle protection plan — a more comprehensive alternative to extended car warranties — if you're concerned about not having an active warranty.
When considering purchasing a leased vehicle, weigh it against other options, such as leasing another car or buying a used car. If you need to get out of the lease early, you'll likely pay a significant fee. Each option will have its costs and benefits. You'll also want to think about your future vehicle needs. If your lifestyle is changing because you are having children, or your kids are leaving for college, ensure that the car you're considering will be suitable in the future.
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