Lease Payoff vs Buyout: Here Are The Differences

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Lease Payoff vs Buyout: Here Are The Differences deepblue4you - Getty Images

Leasing a car has specific advantages and drawbacks. One advantage is that you can drive a new model while usually paying less per month than you would if you financed it. However, most leasing periods last between two and four years, so you'd soon have to decide whether to trade in your leased vehicle for another one. Learning about your options is important because knowing the difference between a lease payoff amount vs. a buyout amount helps you make an informed decision.

Your leased car's buyout price is the total amount to pay if you want to own the car at the end of its leasing period. This usually includes the leasing company's estimated car value or residual value, plus any outstanding fees and taxes. Buying out your leased car can be a good idea if its current value exceeds its buyout price.

The lease payoff amount is the total sum to pay if you want to buy the car before the lease contract expires. This includes its buyout price and the equivalent of the remaining payments due until the leasing period expires, plus a car purchase fee in some cases. The further you are from the end of your leasing period, the greater the difference is between the buyout price and the payoff amount.

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Is Trading In Your Leased Car a Viable Option?

The answer to this question depends on many factors, but the most important one is usually your personal situation. Maybe you have more expenses than before or earn less money per month. Trading in your leased car for one with lower monthly payments would make sense in this situation. An optimistic scenario is that you suddenly earn considerably more money and want a more expensive car; therefore, you would trade in your leased car for your dream car. Other scenarios where it would make sense to trade in your leased car include the following:


The Car Is Damaged

Damaging your leased vehicle or failing to maintain it properly typically leads to significant penalties when the leasing period ends. If you're in this situation, you may want to look at your lease contract and see how much more you have to pay. Comparing this to your lease payoff amount helps you determine whether trading it in beforehand is less expensive. Another option in this situation is to buy it out at the end of the leasing period and then keep it or sell it on the open market.

You Exceeded the Mileage Limitations

Many car lease agreements have limitations regarding the number of miles you can drive the car each year. Exceeding it usually means that you'll have to pay an extra fee proportional to the number of miles you drove over the specified limit. Similar to the previous situation, after calculating the extra costs, you may conclude that trading the car in or buying it off is the less expensive option.

What Are Some Common Trade-In Scenarios?

The following are some common ways in which a trade-in occurs:

You Take Advantage of a Pull-Ahead Program

Car manufacturers and dealers use pull-ahead programs to keep you as a customer by allowing you to trade in your leased vehicle for another one and save on early termination fees. The exact terms of each pull-ahead program differ from one manufacturer or dealer to another, with some even allowing you to trade in your car six months before its lease term expires. This is the ideal way to do a trade-in, as there are no extra costs.

You Trade In Your Car at the End of the Leasing Period

When your lease period ends, you may want to trade in your current leased vehicle for another one. The most straightforward way of doing this is usually to contact your current leasing company or car dealer and see what their options are for starting a new leasing contract. If your current vehicle is worth more than its residual value, contact multiple dealers and convince them to buy your car for more than its buyout price. This means you can make a profit to use as a down payment on another car. You'll want to check whether your leasing company allows this if you want to opt for a third-party lease buyout.

You Trade In Your Car before the End of the Leasing Period

If you need to trade in your current vehicle before your leasing contract expires and there are no pull-ahead programs to take advantage of, it'll likely cost you extra. Even if the car dealer pays off your lease balance, you'll likely have to pay that amount as part of your next lease program. You may also have to pay additional fees, such as those for wear and tear or for putting more miles on it than you agreed to in the lease contract.

What to Consider When Buying Out a Lease

Buying out your lease may be a smart decision or lead to unnecessary extra expenses. Ensure that you're making the right choice by considering the following tips:

Consider Your Car's Current Value

The amount of money your car is currently worth is a decisive factor in deciding whether buying out your lease is a good idea. There are many online sources that help you calculate how much your car is currently worth based on such factors as age, make and model, engine size, and current condition. If it's worth more than it would cost you to buy out of your leasing agreement, doing so is likely a good idea.

Make Sure the Timing's Right

Knowing when to act is also important when buying out your leased vehicle. If you're considering doing so before the lease period expires, make sure you know exactly what the lease payoff amount will be. If it's too high, it may be worth waiting until the lease period expires so you can avoid any potential early termination costs and ensure you have already paid your remaining lease payments.

Get Multiple Financing Quotes

Although it's easier to work with the same leasing company when financing your buyout, you may potentially get a better deal if you find out what other financial institutions can offer you. There are no extra costs for working with another leasing company, so finding a better deal helps you save some money. Also, even if you do decide to use the same leasing company, showing a company representative that you have better offers from their competitors may motivate them to offer you a better deal. This could include a lower interest rate and more affordable monthly payments.

Try to Let the Leasing Company Contact You First

Leasing companies usually ask their customers a few months before their leasing contracts expire whether they're interested in a new deal. As with most negotiations, letting them make the first move may work to your advantage, as they wouldn't know that you were going to contact them anyway for a buyout. This may lead to them offering you better terms or waiving certain costs, such as the purchase option fee.

When Is Buying Out Your Leased Car a Good Idea?

There are several situations in which buying out your leased car is worth it. First, as the article discussed earlier, if it's currently worth more than you have to pay your leasing company, buying it out makes perfect sense from a financial standpoint. You can sell it tomorrow and make a significant profit from it. Get an estimate on its current price, and read your lease contract to determine how much it would cost you to buy it out. When deciding whether it makes financial sense to buy the car, make sure you consider any potential extra fees for excess mileage and wear and tear that you'd incur if you instead returned the car to the dealership.

Buying out your leased car doesn't always make sense financially. Maybe you really like the car and don't want the hassle of analyzing and negotiating new lease deals every few years. After all, you decided to lease it in the first place because you liked it, and it fulfilled your needs. That would not likely change in such a short period. If that's the case with you, then buying out your car is likely a good idea.

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