What Is a Lease Buyout Loan? Should You Use One?

Written by Kim PinnelliReviewed by Nathan Brown, CFP®Updated: 3rd Nov 2022
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At the end of your car lease, you have the option to buy the car, which usually requires a lease buyout loan. While it’s similar to a car loan, there are some nuances you should understand.

What Is a Lease Buyout Loan?

A lease buyout loan gives you the funds to buy out your lease when it expires. Instead of turning the car back into the leasing company, you buy it and become the owner. A lease buyout loan is like a car loan, but not all lenders or banks offer them since there is some risk.

>> More: See the Best Lease Buyout Loans

How Does a Lease Buyout Loan Work?

If you want to buy out your lease, you’ll need financing. First, make sure your leasing company will allow you to buy out the lease. You can secure financing from a lender offering a lease buyout loan if available. The interest rates and terms are similar to a traditional car loan, but many lenders have restrictions on how old a car can be or how many miles it can have to decrease their risk of a loss.

Who Offers Lease Buyout Loans?

Lenders, banks, and credit unions offerlease buyout loans, but not all do. Make sure you’re specific in your request when you ask about financing. A lease buyout is different than a loan to buy a car.

How to Get a Lease Buyout Loan

Getting a lease buyout loan isn’t as hard as it seems, though. Here are the simple steps.

#1. Ask Your Leasing Company First

Start with your leasing company. Not all leasing companies allow you to buy out your lease. You can read the terms on your lease or call them to find out if you can buy out the lease. If you can, you must know the residual value or buyout cost.

It may be the residual value noted in the lease, but some leasing companies charge other fees on top of that if you decide to buy it out.

#2. Shop Around and Compare Rates

Just like when you get a traditional car loan, make sure you shop around to get the best rates. Each lender will have different requirements and restrictions. Compare the APR, loan costs, and the total cost of the loan at the end of the term to find the best loan for you.

>> More: Best Auto Loan Rates

#3. Apply for a Lease Buyout Loan

Most lenders offer an online process to apply for a lease buyout loan but follow the procedure each lender requires. Some banks, like Bank of America, offer in-person applications, too, if you need hand-holding or someone to explain how the process works. However, we recommend using a marketplace like Tresl or Autopay, which allows you to compare rates easily.

#4. Get Approved and Close on the Loan

You can typically get pre-approved for a car loan within hours. It may take a few days to close on the loan, though. It depends on what documentation the lender needs from you. If they have to verify your employment or income, it can take longer.

Once you are approved and close on the loan, you pay the leasing company off and become the owner of your car. The lender holds onto the title until you pay the loan off in full, though.

#5. Remember About Insurance

Don’t forget to switch your insurance from a leased car to an owned car. Your lender will require full coverage, and you must name them on the insurance policy. Reassess your liability coverage amounts, too, as many leasing companies require inflated liability coverage that you may not need now that you own the car.

Traditional Auto Loans vs. Lease Buyout Loans

When comparing traditional auto loans vs. lease buyout loans, you’ll instantly notice one big difference – the interest rate.

Lease buyout loans usually have a higher interest rate because of the risk, just like used car loans have higher interest rates than new car loans. The terms of the loans are usually the same, but the overall cost can make a difference in your decision.

Are Lease Buyout Loans Smart?

Lease buyouts can be smart if you take care of the car and know you’re making a smart purchase. It’s like buying a used car, only you know the owner and how well (or not) you kept up the car. If the car is in great condition and you like it, a lease buyout can be smart.

But there are times when a lease buyout isn’t smart. According to Kelley Blue Book, if the car’s buyout value is higher than the current market value, you would enter car ownership upside down or owing more than the car is worth.

When Does Using a Lease Buyout Loan Make Sense?

If you’re okay with keeping your leased car for the long-term and you know it’s in good condition, a lease buyout loan can make sense. You know what you’re getting and know you like it. But it only makes sense if the buyout value is less than the car’s current value or at least equal to it.

It’s important to do your research and see what a car is worth, what its demand is like, and even what type of repairs the make and model typically need as it gets older.

Bottom Line: What Is a Lease Buyout Loan?

If you love your leased car and aren’t ready to part ways with it, a lease buyout loan can help you. You’ll take out the financing to buy the car at the buyout value and become the owner. But before you do, make sure you do your research, know your options, and make sure a lease buyout loan has affordable terms.

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Kim Pinnelli
Kim Pinnelli

Kim Pinnelli is a Senior Writer, Editor, & Product Analyst with a Bachelor’s Degree in Finance from the University of Illinois at Chicago. She has been a professional financial writer for over 15 years, and has appeared in a myriad of industry leading financial media outlets. Leveraging her personal experience, Kim is committed to helping people take charge of their personal finances and make simple financial decisions.