We typically break down car owners into two types of people: people who lease their cars and people who buy their cars. People who lease their cars love that new car smell and never want to give up the opportunity to get the latest and greatest car every few years. And people who buy their cars love the freedom that comes with having something all to yourself.
But what happens when a lease person wants to switch teams? Their current car is all they’ve ever wanted and more, so the idea of giving it up is too much to bear. Enter the car lease buyout.
Car leases are generally for a period of either 24 or 36 months. At the end of that time period, you have three options:
Trade your car in for a new lease
Return your car
Buy your car
Buying your car from your lease is a little different than when you go to buy a new car. First of all, there is less risk of investment because you already know that you love the car and have knowledge of any issues or problems the car may have. There are no mysterious previous owners that may have mistreated the car.
The buyout loan amount will also be significantly less than when you buy a new car. Because the car has already taken its biggest hits on depreciation, the car will not be as expensive as when you buy a new car. Let’s look at what you should consider when deciding if a lease buyout is right for you.
There are a lot of reasons that buying a leased car is a great option. If you simply love your car and do not want to get a new car, that might be reason enough for you. But there are other great reasons to buy your leased car.
All lease agreements allow for a small degree of wear and tear. A scratch or ding here and there is generally acceptable and expected to a certain degree. But if your car has a significant degree of wear the leasing company might charge an exorbitant amount in fees upon the return of your lease. Buying the car out instead will help you avoid these fees and put your money to better use.
Every lease agreement has a mileage cap on it, typically 12,000 to 15,000 miles per year. For every mile over that limit you will be charged. You could easily spend hundreds if not thousands of dollars in overage fees by the end of your lease. But if you buy your car, you can put that money to better use.
If you are under your allotted mileage by a significant amount, your car may be worth more than the dealer is valuing it at. In this case, your car may be worth more than the buyout and you can sell it for a profit.
To determine if a buyout is worth it, you will need to consider the total cost of the buyout, not just the residual value that is listed in your contracts. The total buyout price will include the following:
The residual value of your car, as listed in your contract
Any remaining payments (you can buy your leased car at any point in your lease)
Any applicable fees
Sales tax
These additional costs can add significantly to the total buyout. But taxes and fees are pretty unavoidable when buying a car, so don’t let it dissuade you too much. Instead be mindful of the added costs and ensure you have enough money to afford your decision.
Before you decide to buy your car, try to determine your car’s value. To do this, you will need to know two things: your car’s residual value and your car’s market value.
The residual value is the value of your car at the end of your lease, determined by the leasing company. This number can be found in your contract and is typically non-negotiable. The market value is what your car is actually worth in the real world (what other people will pay for it). You can determine the market value by using a website such as Kelley Blue Book or Edmunds. These websites can determine how much your car is worth based on the make, model, year, and condition of your car.
Comparing these numbers can help you decide if buying your lease makes sense. If the Kelley Blue Book value is much lower than the market value of your car, you may be paying more for your car than it is actually worth. Let’s say the residual value of your car is listed at $15,000 in your contract, but the market value is $12,000. If you bought your lease, you would be paying $3,000 more than your car is worth. If on the other hand the market value is listed within a few hundred dollars of the residual value, it is most likely a fair deal.
If you are looking to secure financing for your loan buyout, be sure to take the time beforehand to ensure your finances are in good order. The rate you are offered for your car loan buyout will depend on your credit score, your debt to income ratio, and the prevailing market rates. While there is nothing you can do about the market rates, you can ensure that your credit score and debt to income ratio are in good standing.
You can prepare your credit score by taking the following steps:
Commit to making full, consistent, and on time payments
Pay down debts, especially those with a high credit utilization ratio
Request a copy of your credit report and ensure there aren’t any errors
Request higher limits on your accounts to increase your credit utilization ratio
Hold off on opening any new accounts
Hold off on anything that might trigger a hard inquiry on your credit
These steps can help ensure that your credit score is as high as possible which will encourage the best car loan rate offers.
It’s a good idea to get in touch with your leasing company directly to answer any and all questions you may have. They can tell you exactly how much you will need to buy the car and tell you what fees and taxes you are required to pay.
Additionally they can tell you if they allow third party buyouts. If a friend or loved one is interested in buying your car a third party buyout may provide a good solution for all involved, but not all leasing companies allow them.
Unless you have enough cash in your bank account to buy your car outright, you will need to secure financing. And in this case, you want to shop around for terms and rates. Don’t be coerced into getting a loan from the dealership as they almost never have the best terms. Look around at a range of lenders, including traditional banks, online lenders, and credit unions. You want to consider the following when looking for a car buyout loan:
Car loan APR
Repayment period
Customer service ratings
Additional fees
When looking for a loan, using a company that specializes in car loan buyouts can handle the comparison shopping for you. Auto Approve has relationships with lenders across the country and can help you apply for different loans and select the buyout loan that is right for you.
When you lease a car, you are typically required to have pretty hefty insurance coverage. The dealership wants to make sure that their asset is covered even when it’s in your possession. But when you buy your car it’s a different ballgame. You are not required to carry any additional coverage (aside from your state’s minimum requirements). So while you may be taking on more debt with a car buyout loan, you may be saving money on insurance.
Buying your leased car can be a great option for you for a number of reasons. But it’s important to do your research and find the best car lease buyout loan possible. That’s where Auto Approve comes in.
At Auto Approve, we can find you the best deal possible for your car loan buyout to ensure that you don’t overpay for your car loan. Getting started is easy–just head over to Auto Approve to chat with one of our loan specialists.
Don’t wait–get your free quote today!