Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Let’s say you’re leasing a car. When your lease contract ends, you have the option to buy the car from the company rather than just returning it and finding a new car to buy or lease. This process is known as a lease buyout.There are many factors that go into determining how much it will cost to buy out a lease. In some situations, it could make financial sense for you. Here’s what you need to know on car lease buyouts, including how it works, things to consider beforehand, pros and cons of lease buyouts, and more.
What Is a Car Lease?
A car lease is a financing contract that lets you drive a vehicle for a temporary period. When you lease a vehicle, a leasing company would typically buy the vehicle from the dealership and become the rightful owner of that vehicle.The leasing contract between you and the leasing company sets certain terms and conditions in which you agree to pay a monthly rent charge for the privilege to drive the vehicle. You may need good credit to qualify for a car lease.Here are some car leasing basics:
A short-term car lease can be anywhere from 12 to 24 months, while a long-term lease can be up to 60 months.
Some leasing companies may charge an upfront car lease acquisition fee for approving your auto lease financing contract.
When negotiating a car lease, you may negotiate for lower rent charges or higher mileage limits, among other things.
You may extend a car lease if the leasing company agrees.
What Is a Lease Buyout?
In basic car leasing, you typically sign a lease agreement that lasts between two and three years. At the end of the lease, you can return the vehicle to the leasing company and then either sign a new lease on a different vehicle or buy a new car.You may also have the option to buy out your car lease. What is lease buyout, and how do lease buyouts work? A lease buyout is when you buy your leased vehicle to become its rightful owner. For a lump sum of cash, you can take ownership of the car you’ve been using rather than return it. All of your past lease payments, however, will not be counted toward the buyout price.The price is determined by several different factors. The first is the residual value. That’s the base amount you must pay (more on that shortly). You may also be responsible for state sales tax, driver’s license and registration fees, and an administrative fee paid to the leasing company.Your lease buyout price should be listed in your original contract, which helps you plan ahead. It may not be the same as the current market value of the vehicle, but you can compare the two to determine whether or not buying out the car lease is the right choice for you when your lease is over.
How Does a Lease Buyout Work
What is lease buyout, and how do lease buyouts work? A lease buyout, as mentioned above, is when you buy your leased vehicle to become its rightful owner. That’s the basic lease buyout meaning: You buy the leased vehicle to transition from car lessee to car owner.You may consider a lease buyout if your leasing contract gives you the lease buyout option. How a lease buyout works is you purchase the leased vehicle for a price that may be specified in your leasing contract.
Purchasing vs Lease Buyout Loan
You may have two options for buying your leased vehicle: You may buy it outright with cash, or you may finance the purchase with a lease buyout loan.Purchasing the vehicle in full would give you 100% equity in the car. This means you’d have full ownership of the car and no lienholders listed on the title. Buying the car with your personal savings may be right for you if you don’t want to borrow funds to buy your leased car.Buying your leased car with a so-called “lease buyout loan” would put you in debt with a repayment term that may range from 36 to 72 months. You may have to pay principal and interest charges on the loan. Leasing a car can help you build credit, and getting a lease buyout loan can help you further build up your credit history. A lease buyout loan may not be right for you if you have no need to borrow money. Buying a car with your own cash assets and without lender financing may be an option to consider if you have sufficient funds in a checking or savings account.Recommended: Leasing vs. Buying a Car
What Is Residual Value?
The residual value of a leased vehicle (the buyout cost) is a percentage of the manufacturer’s suggested retail price (MSRP). It’s based on how much the leased vehicle is projected to bring in if it were auctioned off after the end of the lease agreement. For instance, if the car’s original MSRP was $30,000 and the residual value rate was 60%, the buyout price would be $18,000.
Things to Consider Before Buying Out a Car Lease
Whether or not a lease buyout is a good idea for you depends on several different factors:
Residual Value vs. Market Value
The residual value is the price you’re required to pay in order to purchase the car after the lease agreement is over. So it’s crucial to compare that amount to the current market value of the car. If the residual value is significantly more expensive, then buying out the lease may not make sense. You could return the leased car and go purchase another car of the same make and model for a lower price. Research the market value price for similar cars in the same condition and with the same amount of mileage as yours to determine how the residual value you’d have to pay stacks up to the car’s current value.
Excess Mileage and Wear-and-Tear-Fees
In addition to the car’s residual value, you also need to consider how you’ve treated the car over the last couple of years. Leasing companies can hit you with high fees in two areas: excess mileage, and wear-and-tear. Check your lease agreement to see the mileage limit. Typically, leases only allow for between 10,000 and 15,000 miles each year of the lease. Depending on the model, you may have to pay anywhere between 15 cents and 25 cents for each mile over the limit. If you drove an additional 5,000 miles for instance, that could cost up to $1,250 at the end of your lease. You may also be charged for excessive wear-and-tear, like cracked glass, dents, and scratches. All of these extra fees could tip the balance toward a lease buyout, because you don’t have to pay them if you keep the car. And even if your residual value is slightly higher than the market value, high fees could make buying out the lease a better deal.
Lease-End vs. Early Lease Buyouts
You may be able to negotiate a better price on your car lease buyout by waiting until the end of the agreement rather than trying to do it during the lease period. Selling the car to you then could save the dealer time and money compared to auctioning off the vehicle.
Other Driving Options
Think about what type of car financing you’d use instead of a buyout lease. You could start a new lease with another vehicle, complete with a new extended car warranty. Or you could purchase a car outright, whether with cash or an auto loan.
Pros and Cons of Car Lease Buyouts
What are the advantages and drawbacks of buying out leases? There are several to consider when you’re making a decision.
Pros of a Lease Buyout:
You can avoid potential excess mileage and lease disposition fees
You’ll own the car as an asset instead of perpetually leasing with no equity
You get to keep a car that you’re familiar with
Cons of a Lease Buyout:
The residual value may be higher than the market value of the vehicle
You may need to secure financing in order to pay the residual value
You become responsible for maintenance and upkeep
Not all of these pros and cons apply to everyone’s situation. Think about the condition of your particular vehicle and the costs involved with returning it at the end of the lease. Then consider the costs of buying and maintaining the leased car. You can compare those totals to the costs of purchasing a different car with an auto loan or getting a lease for a new car.
Paying for a Lease Buyout
As mentioned earlier, you may have two options for buying your leased vehicle: You may buy it outright with your personal cash savings, or you may finance the purchase with a lease buyout loan.A lease buyout loan is similar to auto refinancing — and you don’t have to get financing through the lease company. Explore multiple lenders and compare terms. This is especially important for interest rates and fees because annual percentage rates on lease buyout loans are often more expensive than APRs for typical auto loans. Your credit score also impacts the rate you’re offered by lenders.Don’t forget to think about the length of the loan term, which usually lasts between 36 and 72 months. The total amount of interest you pay will be lower with a shorter term, but the monthly payments will be more expensive. Your loan offer should include a quote showing how much interest you’ll pay over the life of the loan. This can help you weigh your options.Lenders also take into account your debt-to-income ratio to determine how much you can borrow. A borrower with a high level of debt compared to their income may need to opt for the longer repayment term in order to qualify.Also remember that a lease buyout loan isn’t permanent. You can always keep an eye out for good times to refinance your car loan, like when rates drop or you’ve built your credit score.
Negotiating Lease Buyouts
A lease buyout, as mentioned earlier, is when you buy your leased vehicle to become its rightful owner. That’s the basic lease buyout meaning: You buy the leased vehicle to transition from car lessee to car owner. Your leasing contract may include an estimated lease buyout price, but you may still negotiate for a better deal.If the market value of your leased car is less than its residual value, you can use that information as leverage when negotiating lease buyouts. A car appraisal can help you determine the fair market value of your leased car. A lease buyout may not be right for you if the leasing company is unwilling to sell the car for a fair price.
Alternatives to Lease Buyouts
Here are some alternatives to lease buyouts:
Extending the existing lease term
Starting a new lease with another car
Buying a new car
Buying a different used car after returning the leased vehicle
The Takeaway
Switching from a lease to an auto loan can offer you some flexibility in your monthly payments over time. An auto loan refinance could lower your payments and help you save cash each month.Lantern by SoFi can help you compare auto refinancing offers from multiple lenders. Just fill out one simple form to view possible prequalified offers.Find and compare auto loan refinance options with Lantern.
Frequently Asked Questions
Can you negotiate the buyout price of a leased car?
How is lease buyout calculated?
What if my car is worth more than the residual value?
Photo credit: iStock/fizkes
LNTALR-Q424-015
About the Author
Lauren Ward
Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
