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If you’re in a lease that’s about to expire, you may wonder what you’re going to do for a car next. But, if you love your car AND it’s a good deal, a lease buyout may be a good option. Here’s everything you must know about buying out a lease and how to decide if it’s right for you.
What Is a Lease Buyout?
All car leases must come to an end, and when they do, you have a couple of options, one of which may be a lease buyout.
If you’ve become attached to your car and aren’t ready to give it up, you can buy the lease out at the buyout price. If you buy out your lease, you own the car rather than lease it, but of course, you must come up with the financing to do so.
How Do Lease Buyouts Work?
When your lease is up, you can buy it at the car’s residual value or the buyout price if you have a buyout provision in the lease. The leasing company determines the car’s residual value when starting the lease. Your lease payments are based on the car’s expected depreciation during the lease term.
The residual value is the car’s value at the end of the lease, and it may or may not equal the car’s current market value. It’s a good idea to see the market value of the car before going through with a lease buyout.
How to Buyout Your Current Lease
If you decide to buy out your current lease, here are the simple steps you should take.
#1. Calculate Your Cars Value
Before you buy out a lease, check Kelley Blue Book for the car’s value. This will help you decide if it makes financial sense to buy out the lease.
#2. Decide If It Makes Financial Sense
Compare the car’s current market value to the lease buyout price. They won’t necessarily be the same, and sometimes the buyout price is more than the car’s value. It wouldn’t make financial sense to buy out a lease for more than the car is worth. You’d be ‘upside down’ on your loan, which means if you sold the car, you’d owe more money than you’d earn by selling it.
But, if the lease buyout price is less than the car’s current value, it’s a good deal and can make financial sense.
#3. Figure Out Financing
Your lease buyout price will include the car’s residual value, remaining lease payments, sales tax, and administrative fees the lease company charges.
Decide if you can pay the amount in cash and if not, you’ll need a lease buyout loan. Not all banks or lenders offer lease buyout loans, so you may have to shop around. This isn’t a purchase loan; you may get a higher APR or have other restrictions such as maximum mileage or a maximum age allowed.
If you have good credit and the buyout price isn’t very high, you may get an unsecured personal loan too. The interest rate may be slightly higher because it’s unsecured (no collateral), but there are often little to no fees on a personal loan, saving you more money.
#4. Contact the Leasing Company
Before buying out a lease, you must let the lease company know of your intentions. Before you do, make sure your lease allows buyouts. If they do, contact them ahead of time to get the buyout price and any necessary information you need to complete the transaction.
#5. Finalize the Lease Buyout
Once you’ve worked out the numbers, secured financing, and are sure you want to buy out the lease, you can finalize the loan, settle the payment with the leasing company and become the owner of the car you previously leased.
#6. Don’t Forget About Insurance
Before getting too excited, though, make sure you switch your insurance from a leased car to an owned car. You must name the lender on your insurance and make sure you have enough coverage. However, you may find that you can decrease your liability coverage as most lease companies require an excessive amount of insurance coverage.
Lease Buyout Examples
Like I said earlier, a lease buyout doesn’t always make sense. Knowing how to look at the numbers and decide which is right for you is important.
Good Lease Buyout
Let’s say you have a leased car with a buyout value of $15,000. You researched Kelley Blue Book, and the car is worth $15,000. If you were to turn the car in today, you’d pay excessive mileage fees and wear and tear charges according to your lease agreement for a total of $2,000.
If you buy out the lease, you could get a low-interest rate because you have great credit. You can even put a little money down to lower the payment. The new payment comfortably fits in your budget. In this case, it’s a good lease buyout. You’ll save money by not turning the car into the leasing company and paying them an extra $2,000 for their fees.
Bad Lease Buyout
Now let’s say the same car has a buyout value of $15,000, but Kelley Blue Book says it’s worth $11,000. You’d buy the car for $4,000 more than it’s worth. This is what it looks like to be upside down on a loan. If you borrowed the entire amount, you’d pay interest on the amount, which means you’d pay more than $15,000 for a car that, when you bought it, is only worth $11,000.
You’d be better off turning the car in, paying the excessive mileage and wear and tear fees, and buying a car that is worth as much as you pay for it.
What Should You Consider Before a Lease Buyout?
Before you exercise a lease buyout, consider these factors:
- Do you love the car and will keep using it?
- Is it worth at least as much as the buyout price?
- Has the car been mechanically sound?
- Will you have to pay excessive fees to turn the car in after the lease period?
- Can you afford the monthly payments on the lease buyout loan?
Is a Lease Buyout a Good Deal?
A lease buyout CAN be a good deal, but it’s not always. You must look at the big picture and decide if it makes financial sense. As a rule of thumb, if the lease buyout value is more than the car’s value, it’s never a good deal. However, in some instances, people often have to buy out their lease because they are over the amount of miles allowed. This is a good idea because it often makes financial sense instead of paying the mileage fine, which can be 15 to 20 cents per extra mile.
Keep that in mind as you consider whether a lease buyout is a good deal for you. Of course, you should consider the other factors, including the car’s reliability and maintenance needs.
Can You Negotiate the Buyout of a Lease?
Whether you can negotiate the buyout of a lease depends on your lease contract. Some lease companies allow it, and others don’t. If you can negotiate the terms, wait until the lease company contacts you. If you contact them first, you give them the upper hand. When they contact you, they are looking to buy it out and may be more willing to accept the terms you offer.
Bottom Line: Lease Buyouts
Lease buyouts are a great way to buy a car you leased and loved and aren’t ready to part with yet. It’s not always a smart move, though. Do your research, know the car’s value and make sure the buyout terms are favorable before jumping on board.