As your car lease agreement nears its end, you’re likely weighing your options. Should you simply return the vehicle, lease a new one, or consider buying out your current leased car? Each path presents its own set of advantages and disadvantages. Let’s delve specifically into the intricacies of buying out your lease and explore if it’s the right decision for you.
“Before making any decisions, it’s crucial to thoroughly review your lease contract for any specific clauses related to lease expiration,” advises Jeff Turley, Head of Auto Lending at PNC. “Your initial agreement with the leasing company, or lessor, might include terms where your down payment and monthly installments contribute to reducing the final lump sum owed at the lease’s conclusion. This sum is commonly known as the residual value, and it’s a vital element in calculating the buyout price if you choose to purchase your leased vehicle.”
Understanding the Costs Associated with a Lease Buyout
Several factors can influence the final cost when considering a lease buyout. The vehicle’s condition and the mileage accumulated during the lease term are significant considerations.
Upon lease return, the lessor will meticulously inspect the vehicle for any wear and tear exceeding normal use and assess any damages, such as bumper cracks or door dings. Refer to your lessor’s guidelines to understand their specific parameters for wear and tear. Generally, you will be responsible for repair costs exceeding a defined threshold if you return the vehicle.
Lease agreements typically include mileage limitations over the lease period. Exceeding this mileage cap often incurs per-mile overage fees. For instance, if your lease agreement capped mileage at 45,000 miles and you drove 5,000 miles beyond that, with an overage fee of $0.25 per mile, you’d face an additional charge of $1,250 upon vehicle return.
Opting for a lease buyout usually eliminates these high-mileage penalties. Confirm this detail by carefully examining your lease contract.
Evaluating Your Leased Vehicle’s Value
“If you decide to purchase your leased vehicle, it’s essential to conduct thorough due diligence, similar to buying any used car,” recommends Turley. “The advantage here is your familiarity with the vehicle. Having driven it for several years, you have firsthand knowledge of its usage and any potential issues.”
A critical step is to determine if the buyout price is reasonable by researching the car’s market value. Utilize online used car valuation resources like KBB.com (Kelley Blue Book) or JDPower.com to assess your car’s worth based on its make, model, year, features, and mileage.
Also, consider the vehicle’s warranty status. A lease term shorter than the warranty period, especially with low mileage, can be advantageous if you proceed with a buyout, as remaining warranty coverage adds value.
Decoding Residual Value vs. Market Value
Understanding the distinction between residual value and market value is crucial for making an informed buyout decision.
The residual value is the leasing company’s estimated value of the vehicle at the lease’s end, predetermined at the lease’s inception. The buyout price is typically based on this residual value plus any applicable fees.
Market value, conversely, represents the realistic price you could expect if you were to sell the vehicle privately or trade it in.
The difference between these two values can be financially beneficial when market values exceed residual values. Comprehensive research is key. Understanding both values can lead to savings or even potential equity if you decide to trade in the vehicle after buying it out.
“Even if you don’t intend to keep the vehicle long-term, if its market value surpasses the lease buyout price, the difference can provide equity to put towards your next vehicle,” Turley points out.
Conversely, a buyout might not be financially sound if the residual value is higher than the current market value. For example, if the leasing company quotes a buyout price of $19,250 for a car with a market value of $18,000, and potential mileage overage charges add another $1,250, you could be overpaying. Sales tax on the residual value may also apply, depending on your state’s regulations.
Financing Your Lease Buyout
A lease buyout loan can provide the necessary financing to purchase your leased vehicle. This loan functions similarly to a standard auto loan, with monthly payments until the loan is repaid. Potential benefits of a lease buyout loan include:
- Avoiding a significant upfront cash payment for the vehicle.
- Investing in an asset that you will fully own upon loan completion.
- Building potential equity in the vehicle that can be used for future vehicle purchases.
If you decide to finance the buyout, compare the financing terms offered by the lessor with those from other lenders, such as banks or credit unions, to secure the most favorable rates and terms.
Your credit history significantly impacts loan approval and interest rates. Reviewing your credit report and understanding your credit standing before applying for a lease buyout loan is advisable. A stronger credit profile typically qualifies you for lower interest rates.
The Impact of Vehicle Supply on Buyout Decisions
Current vehicle market dynamics, particularly vehicle supply, can influence the attractiveness of a lease buyout.
“While vehicle supply chain issues are easing, availability can still be a concern for specific models or trim levels,” Turley notes. “Some individuals who ordered new vehicles anticipating their lease end are experiencing delivery delays. This situation is contributing to more lease buyouts as lessees choose to wait for their ordered vehicles or continue their vehicle search.”
To facilitate informed decisions about vehicle costs and financing, resources like Total Auto: Find & Finance Your Car can be invaluable for comparing options.
Ultimately, deciding whether to buy out your car lease requires a careful evaluation of your individual circumstances, financial situation, and vehicle needs. By understanding the costs, values, and financing options involved, you can make a well-informed decision that aligns with your best interests.
