Should You Buy Your Car When Your Lease Is Up?

Group of Young Adults Having Fun Riding in Car

When your auto lease ends, you have a few options: Turn in the car and buy or lease a new one, or buy the car you're leasing from the leasing company. If you've fallen in love with your leased car, you may be tempted to buy it. Whether that's a good idea or not depends on its value, condition and mileage, as well as your budget. Here's how to decide if a lease buyout makes sense.

How Does a Lease Buyout Work?

Like buying a car, leasing one typically involves making a large upfront payment and smaller monthly payments over the lease term (generally two or three years). The key difference is that a vehicle becomes yours when a loan is paid off, but you won't own a leased car when its lease is up. At the end of a lease, you return it to the lessor, who sells it through a dealership or at auction. They may also give you the option to buy it.

A few months before your lease term ends, the leasing company will usually contact you to explain the end-of-lease process and schedule inspections before you turn in the car. This is a good time to start thinking about whether you want to buy your leased car. Don't tell the lessor your plans just yet, though—you'll need to do some research first.

Lease agreements typically list a purchase or buyout price. This cost is commonly a combination of the vehicle's residual value (the vehicle's projected end-of-lease value that's determined at the beginning of the lease) and a purchase option fee the leasing company may charge. Unfortunately, the lease payments you've made on the car don't go toward buying it, so you'll have to either come up with the cash on your own, or secure financing that covers the vehicle's buyout price.

When Should You Buy Your Leased Car?

Does buying your leased car make financial sense? Ask yourself these questions to decide.

  • Can you afford a cash buyout or will you need a loan? Consider your budget and use an online auto financing calculator to estimate your car payments for various loan terms and interest rates. Since the vehicle you're buying is already a few years old, try to keep your loan term as short as possible. Longer loan terms mean lower payments, but you'll pay more in interest and could even end up with negative equity—that is, owing more on your loan than the car is worth.
  • Is the vehicle worth buying? To see if the car is really worth the residual value listed on the lease, use the appraisal tools on Edmunds, Kelley Blue Book, NADA and other automotive websites. Research what local dealers and private parties are asking for the same make, model and year of car. Take the average of all those prices to come up with an estimate. If the car is worth more than the residual value projected at the start of your lease, buying it could be a bargain. If it's worth less, you may not want to buy it unless you can negotiate a lower buyout price.
  • What's the condition of the car? If you've taken great care of the car and had few mechanical issues, you can buy it with more confidence. Counterintuitively, it might also make financial sense to buy a leased car with dents, scratched paint, torn upholstery or similar damage. When you turn in a leased vehicle with excess wear and tear, the lessor must fix it before selling it, and you'll pay the price. By purchasing it, you'll avoid this fee. You can always repair the damage later if it bothers you.
  • Did you exceed your mileage limits? Leases commonly limit the number of miles you can drive every year without penalty. This limit is typically between 10,000 and 15,000 miles, but high-mileage leases are available. At the end of the lease, you'll be charged for every additional mile driven. If you exceeded your limit by 15,000 miles on a three-year lease with a $0.25 per mile fee, you'd be on the hook for $3,750 in excess mileage when you turn in the car. Buy the car and you won't have to pay.

Also consider any other savings or costs from buying a leased car. For example, you'll generally pay less for registration and insurance for an older car than a newer one. However, older cars are typically more prone to mechanical problems and need more maintenance than new ones, which could mean higher repair costs.

How to Pay for Your Lease Buyout

Once you've decided to buy your leased car, the next step is financing the lease buyout. Leasing companies and dealerships may offer to arrange financing, but you'll boost your bargaining power (and potentially save money) by getting preapproved for a car loan from a bank or credit union before you approach the leasing company.

To get the best financing offers, check your credit report and credit score several months before your lease ends. If your score is lower than you expected, improving your score before you shop for a loan can help you get a better interest rate.

Once your credit score is shipshape, you can start going over your financing options and submitting loan applications. It's wise to submit multiple preapproval applications to a variety of lenders to shop around for the best interest rate. Credit scoring systems generally treat multiple loan applications in a short period as one application, so submit all your applications within a two-week period and they'll be combined into one hard inquiry as far as your credit scores are concerned. Alternatively, getting prequalified for a loan will give you a ballpark idea of your financing costs without any impact to your credit.

Can You Negotiate a Lease Buyback Price?

Depending on the lessor, you may not be able to negotiate the price of your lease buyback. However, some leasing companies are willing to bargain to avoid the time and costs involved in reselling the car on the lot or at auction. Others may be willing to reduce the price if you finance the vehicle with them so they can keep you as a customer.

Use the research you've gathered to show that the car's residual value is lower than that in the contract. If the lessor won't negotiate on price, see if you can get them to remove the purchase option fee. Are you preapproved for financing elsewhere? See if the leasing company will match or beat the offer.

To Buy or Not to Buy Your Leased Car

You may be crazy about your leased vehicle, but the decision to buy it when the lease ends should be based on more than just emotion. Carefully assess your budget, the car's condition and cost, and your financing options before you make the leasing company an offer. Whether you lease or buy your next car, maintaining a good credit score will make it easier to get favorable financing terms.

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