Yahoo Autos What Is a Lease Buyout and When Does It Make Sense to Use One?
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When you lease a vehicle, you agree to make monthly payments over a set period to use the car temporarily. Near the end of the lease, your leasing company may offer a lease buyout. But what is a lease buyout, and when should you consider this offer? A lease buyout allows you to purchase the vehicle at or before the end of the lease so you own the vehicle outright.
Purchasing your vehicle at the end of your lease offers many conveniences, particularly if you've become attached to your car. However, you should consider this choice carefully to ensure you get a good deal.
What Is a Lease Buyout?
A lease buyout involves purchasing the vehicle that you currently lease. This allows you to keep the vehicle at the end of your lease rather than return it to the dealership, as you'd otherwise have to. Buying out your lease is fairly straightforward, but you shouldn't consider this option without careful thought.
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How Does a Lease Buyout Work?
Your lease agreement specifies if and how you can buy out your lease. If your contract allows for a lease buyout, also known as a purchase option, you should begin by contacting the dealership to review the process for buying out your vehicle at the end of the lease term.
When you buy out a lease, the leasing company will ask you to pay the purchase amount as determined in the lease agreement. Also known as the residual value, the purchase amount is the estimated value of the vehicle at the end of the lease or at the time of the buyout if it's sooner. Leasing companies are legally required to include the vehicle's residual value on the lease agreement if they offer the option for a lease buyout.
When you buy out your lease, you'll need to pay the residual value of the car as well as any additional fees and taxes associated with the buyout process. These additional costs typically include the following:
A purchase-option fee.
State and local sales taxes.
The registration fee.
Administrative fees.
You can finance your purchase much like you would the purchase of any other used vehicle. You can also pay for the vehicle upfront if you have cash on hand. Paying cash for your vehicle is always preferable, as it frees you from any interest, though it isn't always financially feasible.
How Does the Dealership Determine Residual Value?
The residual value of your leased vehicle is a percentage of its manufacturer's suggested retail price (MSRP). This is essentially the projected value of the vehicle at the end of the lease term.
Dealerships determine a car's residual value by considering factors such as:
The vehicle's reliability and safety.
The vehicle's estimated resale value.
Fluctuations in gas prices.
Economic conditions.
Technological changes.
You will typically see the residual value represented as a percentage, such as 60%. This means that if the vehicle has an MSRP of $30,000, its residual value will be $18,000.
Negotiating a Lease Buyout
Though the dealership has already determined the vehicle's residual value, this doesn't always mean you're locked into a set price for your car. Some dealerships allow you to negotiate the price of the vehicle. Wait until the dealership contacts you about your lease buyout options, as this will give you a little more negotiating power. If you show interest too early, the dealer will feel less inclined to offer you a great deal.
If your leaseholder has a no-negotiations rule for the residual value, ask whether you can negotiate on other points. The dealership may waive some additional fees or offer a purchase incentive. The purchase option fee is often one of the easiest negotiating points, so don't pay this sum without looking for a little leeway.
You can also negotiate your loan's interest rate and terms if you're financing the lease buyout. Most dealerships will offer a lease buyout loan to help you finance the purchase. While it's worth reviewing the terms, you should compare other loan options to ensure you're getting competitive terms and an affordable monthly payment.
Benefits of Buying Out a Leased Vehicle
You'll enjoy some distinct benefits if you opt to buy out your leased vehicle. One of the major perks is that you can simply hold on to the vehicle you're already familiar with. You don't have to go through the hassle of finding another car, test-driving it, looking for potential problems, and determining whether you're likely to enjoy it. You already know your leased vehicle's history, perks, and quirks, so you know there'll be no surprises if you choose to purchase it.
If you've racked up excess mileage, left stains on the upholstery, sustained some damage, or otherwise exceeded the allowable wear and tear on your leased vehicle, purchasing it can help you avoid the associated penalties and fees. You'll also get to sidestep the lease disposition fee if this is something that your leasing company charges. The disposition fee covers inspecting, cleaning, and prepping the vehicle for its next owner, which in this case is you.
Lastly, buying out your lease frees you from the perpetual car payments you'd make if you were to continue driving a leased vehicle. If you purchase the vehicle with cash, you're free from monthly payments entirely. If you finance your buyout, you'll have a set number of payments ahead of you, after which you'll own the vehicle outright.
Drawbacks of Buying Out a Leased Vehicle
Buying out a lease isn't always the most affordable way to own a car. It's crucial to compare the residual value and market value of your vehicle. It's possible that a lease buyout will cost more than simply purchasing a different vehicle.
While securing a lease for a lease is similar to getting a loan for a new or used vehicle, the finer points of the lease differ slightly. This means your loan terms may be less favorable for a lease buyout, leaving you with higher interest rates throughout the life of the loan.
Although you'll have the same vehicle, you'll no longer enjoy the leasing perks your dealer may have provided. These perks often include free maintenance services, such as oil changes and tire rotations. Those costs will come out of your own pocket after a lease buyout.
Things to Consider Before Buying Out Your Lease
Before you buy out your lease, research the vehicle's value and compare it with the buyout price. Look up other available cars of the same make and model with similar mileage and see what you'd have to pay to purchase a similar used vehicle.
Compare your loan options for the purchase of a used vehicle with a lease buyout. Discuss the ins and outs of both options with your bank, credit union, or another financial agency so you clearly understand what you'll pay monthly and over the life of the loan with either route.
Read the fine print of your lease agreement regarding mileage and wear and tear. Check whether you'll have additional fees to pay for driving too far or otherwise damaging the vehicle and include these in your overall calculations when determining whether it makes financial sense to buy out your lease.
Alternatives to a Lease Buyout
Whether or not you choose to buy out your vehicle's lease, you have to decide your next steps at the end of the lease term. If you're not convinced a lease buyout is right for you, you can also consider the following:
Extending the term for your existing lease.
Leasing a new vehicle.
Purchasing a new vehicle.
Purchasing a used vehicle.
With careful thought and research, you can determine whether a lease buyout is the best option for your needs, preferences, and budget.
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