Can You Finance a Lease Buyout? What You Need to Know

handing over keys in a lease buyout
Can You Finance a Lease Buyout? kupicoo - Getty Images

When you lease a vehicle, you are essentially renting it for a set period. However, at the end of your lease, you may decide that this is the car of your dreams and that you're simply not ready to give it back. In such a case, you may be able to buy out the lease. So, can you finance a lease buyout? The answer is usually yes.

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If your leasing company included a purchase option in the contract that provides for a lease buyout, this means you can purchase your leased vehicle at the end of the contract for a predetermined price. If you don't have cash for the purchase, you can apply for financing, much as you would with any other new or used vehicle. However, there are a few key differences you should know about to ensure you get a good deal on your lease buyout.


What Is a Lease Buyout?

A leased vehicle is only yours for a limited time. When the lease is up, you're expected to return the vehicle to the dealership. However, many lease agreements include an option for a lease buyout, also known as a purchase option. When you buy out your lease, you purchase the vehicle from the leasing company and take over full ownership.

Not all lease agreements include a purchase option, so you'll need to review yours carefully to determine whether a lease buyout is an option for you. If your lease agreement does include a purchase option, it will also list the vehicle's residual value. The residual value is the anticipated price for the vehicle at the end of the lease term, written as a percentage of the car's original price. You agree to the residual value when you sign the initial lease agreement, and it's usually non-negotiable.

The lease buyout will include the residual value of the vehicle, a purchase option fee, local and state sales taxes, and any other applicable fees.

What Is a Lease Buyout Loan?

When you're buying out a lease, you can pay in one of two ways: with cash or a lease buyout loan. A lease buyout loan is similar to other auto loans and usually has a term of three to six years. However, the interest for a lease buyout loan is usually higher than the interest charged when purchasing a new car.

As with any loan, you must complete an application and obtain approval to borrow the funds. Lenders typically look at your credit score, income, and other financial information to determine whether you qualify for a loan and what interest rate you'll pay. The higher your credit score, the better the terms of your loan.

Types of Lease Buyout Loans

As soon as you tell your leasing company you're interested in a lease buyout, they will likely connect you with their own finance department to recommend lease buyout loans. The dealer's lease buyout loans are one choice you can consider, but this isn't your only option. Banks, credit unions, and other finance companies may offer lease buyout loans, as well.

If you opt for the dealer's lease buyout loan, you'll probably have to submit to a vehicle inspection, which comes with an added fee. The dealership will also handle the title transfer and other paperwork, which may incur additional fees.

If you choose a lease buyout loan from an independent lender, you can typically bypass this inspection and save some money. While some lenders will handle the title transfer, others let you do this yourself. You'll still have to pay for the title transfer at the bureau of motor vehicles, but you won't have to face any extra charges when you handle this task yourself.

How to Compare Lease Buyout Loans

It's a good idea to look into two or three lease buyout loans, even if you're fairly confident about which lender to use. When you apply for a loan, the lender makes a credit inquiry, which has a minor impact on your credit score. However, multiple inquiries made within a 14-day window are often counted as a single inquiry. This means you should shop around quickly to get a solid idea of what's available.

When comparing loans, consider the following factors:

  • The interest rate or APR: This is one of the most important points to consider when comparing loans. The higher your interest rate, the more you'll ultimately pay for the vehicle.

  • The loan term: The loan term specifies how long it will take to pay off the vehicle. A longer loan term means lower monthly payments. However, you want to make sure your loan doesn't last longer than you plan to own your vehicle.

  • Monthly payments: Your interest rate and loan term determine how much you'll pay for your vehicle each month. Make sure this is a number that fits comfortably within your budget.

Once you've completed the appropriate application, a lender can provide you with a loan pre-approval, which lets you know what terms to expect. Pre-approval doesn't always guarantee these terms, as you'll still have to go through the final approval process. However, you can present a pre-approval rate from one lender to another and see whether they'll match or beat it to win your business.

Important Considerations for Your Lease Buyout

Before completing your lease buyout, there are a few important points to consider. While buying out your lease is a great way to hold onto a car you love, it's not always the best financial decision. Look up similar vehicles with comparable mileage and see what they're selling for. If the purchase price for a similar vehicle is lower than what you'll pay to buy out your lease, a lease buyout may not be your best option.

A lease buyout may save you money if:

  • The residual value quoted on your lease agreement is less than the car's value.

  • You've exceeded your allotted mileage and will pay a hefty fee if you return the vehicle.

  • Your leased vehicle has sustained damage or excessive wear and tear that you'll have to pay for if you return the vehicle.

Though the car's residual value is usually non-negotiable, other fees associated with a lease buyout are. You can haggle over purchase option fees, dealership fees, administrative fees, and other charges that are tacked onto the lease buyout. If your dealership is charging exorbitant fees for your lease buyout, you can go straight to the vehicle manufacturer, which is often the leaseholder. This may give you more negotiating power.

Alternatives to a Lease Buyout Loan

If you can't get the terms you want with a lease buyout loan, several other options are worth exploring. You can look into renewing or extending your lease if you want to keep using the same vehicle. As your credit score improves over the life of the lease, you may have more favorable loan options when the new lease is over.

If you'd like to try another vehicle, you can return your car at the end of the lease term and lease a new one. Now that you're well-versed in the process of buying out a lease, you'll likely keep a closer eye on the residual value and purchase option terms for your next lease.

You can also return your leased vehicle and consider auto loans for a different new or used car. You'll typically find more options for these conventional car loans than for lease buyout loans.

For most individuals, the answer to "Can you finance a lease buyout?" is yes. You can explore a variety of lenders, compare terms, negotiate a deal, and make that leased vehicle yours. Do take the time to consider all financial aspects of this choice to ensure a lease buyout is the best option for your situation.

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