It’s no secret that buying a car right now is a little tricky. New car prices are sky high due to increased demand, limited supply, and inflation. So if you have a leased car, the thought has probably crossed your mind to just buy it. But is it really a good idea to buy out your car lease?
Let’s talk about car lease buyouts and why they are a great option for many people.
What is the best thing to do at the end of a car lease?
Car leases are essentially long term rentals on your new car. Instead of shouldering the responsibility of buying a new car, you can simply lease a car for a few years (typically 24 to 36 months). Leasing a new car is very popular for a number of reasons.
- You will have lower monthly payments as opposed to financing
- You will not have to deal with selling your car when you want a new one
- You can get a new car every few years
- Your warranty will cover most repairs (and even some maintenance)
- You can maximize tax deductions as a business owner
But it is very common for people to become attached to their leased car. They might feel torn at the end of their lease period as to what to do. When your car lease ends, you have a few different options.
Trade your car in for a new lease
When you trade your car in, you are essentially starting over. You can pick a new car and new trim level, and you will negotiate your lease payments and terms.
Return your car
If you no longer need a car, or you have another plan for buying a car, you may want to simply return your car. You will pay whatever fees are outlined in your agreement, and then you are done.
Buy your car
Buying your car at the end of the lease can make a lot of sense, and for many people it is the best option. These are just some of the benefits of a car lease buyout:
- You have an asset at the end of your payment period
- You can finally customize your car
- You can save yourself the hassle of finding a new car
- You can save money
- You can sell your car privately and make a profit
It may surprise some that a lease buyout can save you money, but it’s true. When you return your leased car you are responsible for a host of fees, including:
- The Disposition Fee: This pays for your car to be cleaned and repaired in preparation for resale. Typical disposition fees run about $350.
- The Wear and Tear Fees: Slight wear is expected and factored into your monthly payments, but you will be responsible to pay for anything deemed excessive.
- The Mileage Fees: Car leases have limits to the amount of miles that you can put on the car per year, usually 10,000 or 12,000 miles per year. If you exceed that mileage you will be required to pay a fee per mile. These mileage fees vary, but they typically range between $.15-$.30 per mile. This can add up to a lot of money if you drive a lot. Even at a fee of $.20 per mile, a 4,000 mile mileage fee can run you $800.
Let’s say all of these fees add up to $1200. That’s $1200 that you will simply be saying goodbye to if you return your car. But if you choose to buy your lease, you will not be required to pay those fees. If you are significantly over on your allotted mileage and/or have significant wear and tear, a car lease buyout might make good sense.
How is lease buyout calculated?
So how much do you pay exactly when you are buying out your car lease? The total buyout of your lease will consist of 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
The residual value of your car is an estimate of how much your car will be worth when your lease is over. This is typically represented as a percentage of the car’s MSRP (usually between 45-60%). The residual value of your car will be listed in your contract, and is typically non-negotiable. Different dealers use different percentages, so it’s important to shop around when you are originally looking to lease.
It’s very important to consider the residual value when you are deciding whether or not to purchase your lease. It’s worthwhile to compare the residual value to its value in the open market. Be sure to look at websites such as Kelley Blue Book and Edmunds to see how the residual value lines up. If your car’s residual value is much higher than what the car is actually worth, it’s probably not a good idea to buy it. On the other hand, if the residual value is much lower than the market value, it’s a good idea to purchase it. With the current vehicle shortage, many lease holders are able to turn a pretty substantial profit by purchasing their lease car and turning around to sell it privately.
If you are buying your car at the end of your lease period, this doesn’t apply to you. But if you decide to buy your car before your lease period is up, you will still be responsible for any remaining payments.
Your contract will list out what additional fees you are responsible for, but you will most likely have to pay a purchase option charge. This is an additional fee of a few hundred dollars that will be added to the total you must pay. If you are financing your lease buyout, you can roll this amount into your financing agreement.
You will also be responsible for sales tax on the final purchase price of your lease. The amount will vary by state.
How do you negotiate at the end of a lease buyout?
If you have decided that a lease buyout is right for you, then you may be wondering how to negotiate a car lease buyout. Unfortunately you probably won’t be able to negotiate the buyout cost, as the residual value will be listed in your contract. But you can negotiate on your car lease buyout loan.
When looking for financing, you want to shop around as much as you can. The dealer will almost certainly offer you some financing options, but dealers rarely have the best terms and rates. Securing your own financing beforehand will assure that you get the best terms and rates possible. Be sure to look at a mix of traditional banks, online lenders, and credit unions when searching for the best car lease buyout loan.
Narrow your search down to four or five lenders that might be a good fit for you. Be sure to apply for all of those loans at roughly the same time. Credit bureaus allow for a fourteen day window where all hard inquiries will count as one hit on your credit score. You don’t want to space out your applications and have your credit score lowered unnecessarily.
When your lease buyout loan offers start coming in, be sure to compare the following terms.
- Car loan APR
- Repayment period
- Customer service ratings
- Additional fees
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.
Once you decide which loan is right for you, it’s just a matter of signing on the dotted line. You will need to pay a visit to the DMV (although Auto Approve will handle this for you if you finance your car through them). You will also have to update your insurance information.
When you drive a leased car, you typically have a pretty strict insurance requirement. But once you own your car you can reduce this drastically. And that can save you a lot of money.
Buying out a lease can be a great idea, especially in today’s car market.
Whether you love your car and aren’t ready to say goodbye, or you know that you can sell your car for much more than you will pay, a car lease buyout can be a great option. And when you use a company that specializes in car lease buyouts, it couldn’t be simpler.
Car loan rates are expected to increase in the next few months, so now is the perfect time to buy out your lease (remember, you don’t have to wait until your lease is over to buy it!) So contact Auto Approve today to get the ball rolling. With a 96% would-recommend rating on LendingTree and an A+ rating with the Better Business Bureau, you know you are in good hands.