So you finally decided it's time for a vehicle upgrade. You've done your research and read through dozens of Car and Driver reviews, and you now have a good idea of what you think is the ideal car for you. Now that the fun part is over, it's time to get a little serious and make a decision about how you plan to pay for it. Finding a way to spread out your expense seems like a better idea than spending all your savings to pay entirely upfront. You'll need to bear this in mind when deciding between a lease buyout vs. financing your purchase.
In simple terms, financing your car purchase means taking out a loan to pay for your car. You repay it in multiple installments, along with interest and any other fees the lending institution charges. After paying off your loan, the car is yours forever—or until you decide to sell it and use the money as a down payment for a newer model.
Leasing is a bit different. As the name suggests, you're essentially renting the car for a period. At the end of the lease term, which is usually between two and four years, you can buy the vehicle for a price that represents its estimated value at that time, called a lease buyout. This article will help you better understand the lease buyout option so you can decide if it's a better idea than financing your entire purchase. Learn more about car leasing by filling out the form below:
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What Is a Lease Buyout Loan?
Even if you choose to lease instead of financing your entire purchase, you may find it appropriate to finance your lease buyout. A lease buyout loan is a type of car loan financial institutions offer to individuals whose lease deadlines are approaching. It can be a good way to finance the car's remaining cost, called the residual value. It's like other car loans, meaning you'll pay monthly installments to cover the car's estimated value, plus interest and fees.
Things to Consider When Opting for a Lease Buyout Loan
While leasing your car and financing its residual value can be a good idea, it's important to review your circumstances to determine if it's the right decision for your particular situation. These are some things you should think about before taking out a loan for a lease buyout:
Not All Lenders Offer Lease Buyout Loans
Unlike regular car loans, which most lending institutions offer, you may discover that your bank, credit union, or financial institution can't help you with financing your lease buyout. In addition, bear in mind that those that can tend to have different rates, so canvassing the market in advance is a good way of getting the best possible deal on a loan. Even if your auto dealer can help you with financing, it's still best to shop around, as you may discover better deals. There are many online tools that can help with this.
Knowing Your Vehicle's Market Value Is Important
Knowing your vehicle's current market value is crucial when deciding whether it's worth buying out your lease. Research dealers and private individuals who are selling vehicles close to yours in terms of year, model, engine size, and trim. In addition, websites such as Kelley Blue Book can help you determine your car's current market price. If you conclude that your car's current market value is higher than its residual value, then opting for a lease buyout may be a good idea from a financial standpoint.
If things are the other way around, meaning your car's current value is lower than what the dealer wants you to pay, then buying it may not be a good idea. This would mean you're upside down on your auto loan, as its market value is less than what you owe. Your options now would be to keep overpaying each month until you pay it off completely or sell it in advance for less than you owe to cut your losses.
Choosing to buy the car out if it's worth less than its residual rate only makes sense if you're emotionally attached to it, which we fully understand. After all, if it's worth more to you, no one can tell you otherwise. From a strictly financial point of view, though, it would be best to take it back to the dealership. You can buy the same make and model at a better price if you want to.
Interest Rates Are Likely to Be Higher for Lease Buyout Loans
When considering taking out a loan to cover your lease buyout, you should consider that the interest rate is likely to be higher than for a new car loan. This makes sense since your car is technically a used vehicle, and used cars have higher interest on loans than new ones. Some lenders even have higher interest than for regular used car loans, so take this into consideration when deciding how to finance your vehicle purchase.
Steps to Getting Your Lease Buyout Loan
If you decide to purchase your leased vehicle with a lease buyout loan, these are the steps you're likely to take:
Get in Contact with Your Leasing Company
As the lease termination date approaches, your leasing company may contact you and let you know your options. If you're considering a lease buyout loan, it's usually best to study your lease contract and determine what your costs are likely to be if you choose to buy the car. This can help you compare the car's depreciated value to the interest you'll pay on a loan and decide if a lease buyout loan makes financial sense for you. Along with the residual value, common lease buyout costs include a purchase option fee, registration and title transfer fees, and sales taxes. You can also be proactive in your approach and contact the leasing company before they reach out to you.
Apply for a Loan Preapproval
Some lenders can help you determine if you match their conditions for a loan before submitting the paperwork. Getting a loan preapproval usually involves sharing some relevant information regarding your financial situation, plus details regarding the vehicle. The lender can then use this information to work out if you're likely to get the loan. While this does not guarantee your loan will be approved, it can give you a pretty accurate estimate of your chances and loan conditions.
Close Your Loan
After getting preapproval, if you're satisfied with the terms, you can proceed to close the deal. Each state has a slightly different procedure for transferring the car title from the dealership to your name, so ask your local department of motor vehicles what you need to do. The dealership or leasing company can help with this process. In many states, you won't be able to have the car title until you pay off your loan since the lender will hold it.
Tips on Deciding Between a Lease Buyout vs. Purchasing or Financing
It seems reasonably simple to decide between a lease buyout and financing your vehicle purchase. If the sum of all lease and residual value loan payments is less than the sum of financing monthly payments, it probably makes sense to buy out the lease. However, there are various ways to help you get your lease buyout costs down and compare your options, as follows:
Analyze Your Lease Buyout Packet
If your lease terms include the possibility of buying out your vehicle, the dealership will send you a document with details regarding your options for the end of your lease period. This will likely include your three basic choices: to return the car to the dealership, buy it out, or trade it in for a new one. The dealership will also likely include different financing options for your lease buyout. Reviewing the documentation can help you understand your situation so you can make an informed choice.
Research Multiple Ways to Finance Your Buyout
Your dealer will likely offer you a buyout loan option, but you can negotiate their loan conditions by shopping around for better terms elsewhere. If you find a loan offer with a better interest rate, present it to your dealer. Since they probably didn't give you the best deal they can offer, finding out you can get a better one elsewhere may encourage them to match those terms.
Inspect Your Vehicle to Determine Its Condition
Although you may think you know what condition your vehicle is in, consider having a professional inspect it. Many lenders won't require an inspection to approve you for a lease buyout loan. But if you go through the dealer for financing, they might want to conduct one to make sure the car meets road safety guidelines. Having your vehicle inspected before deciding whether to buy out your lease can help you make a more informed decision.
Consider an Independent Lease Buyout Loan
If you're not satisfied with your leasing institution's conditions for a lease buyout loan and it's not willing to match other offers on the market, you can get a loan elsewhere. It probably won't mind, as its priority is to get the full residual value for the car, regardless of the source. After finding a lender with better rates, you can complete their application process, have your new lender complete the buyout from your old one, and transfer the car title to your name with your new lender's name on the title as a lienholder.
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