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What Is a Lease Buyout? What You Need to Know

What Is a Lease Buyout? What You Need to Know
Lauren Ward

Lauren Ward

Updated October 19, 2021
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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, and this process is known as a lease buyout.There are a lot of 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 how the whole process works and what you should consider as you make your decision. 

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. But another option is to buy out your car lease. 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’ll also be responsible for sales tax, DMV 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.

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 year, 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 towards 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:

  • You can avoid potential excess mileage fees and wear and tear 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:

  • 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

A lease buyout may cost more than you’re willing to shell out from your savings account. It’s important to have a plan for how you’ll pay for it. One option is to get a lease buyout loan. It’s similar to online auto loan 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 auto lease buyout APRs 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 your credit score improves.

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 see offers from lending partners in our network.
Photo credit: iStock/fizkes
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC0921176

About the Author

Lauren Ward

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.
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