Car Lease Buyout: How Does It Work?

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What is a lease buyout?

A lease is often equated to renting a car, but a better analogy might be renting an apartment. When you lease an apartment, you’re buying the right to use it for a certain period of time. The same is true for car leasing.

However, unlike most apartments, when a car lease is up, you can’t sign for more time — you can either turn the vehicle in or buy it. Buying your leased car is called a buyout. It can be done by paying cash or by obtaining a loan the way you would for any car purchase.

Table of contents:

How a lease buyout works

Three months before your lease ends, the lease provider should contact you to go over your lease-end options. You then have two months to decide what you’d like to do. Assuming you decide to buy your car, you should apply for a few lease buyout loans in the last 30 days before your lease ends. Get a few offers to compare, then go ahead and sign the best one offered to you if it all looks good, about a week before your lease ends.

A car lease buyout could be a great opportunity to purchase the car you fell in love with or a great way to avoid paying high lease turn-in fees. To complete a lease buyout, you can either pay cash or get a lease buyout loan to purchase the car. If you’re considering buying it now that your car lease is up, here’s a guide on when to consider it — or avoid it — and how to get your best deal.

If the lessor does not contact you, you should reach out to them. Typically, there are three options for you to choose from.

 

1. Lease buyout

Buy your leased vehicle for the residual value either by paying cash or getting a lease buyout loan. Use a car loan calculator to run some numbers and see what payment you could expect. Then rate shop and see which lenders are offering your best auto loan rates.

Make sure your choice is comfortably affordable for you. The conservative 20/4/10 budgeting rule could be a good guide on how to structure your transportation costs within your larger budget.

 

2. Lease turn-in

Return the car, pay any fees and walk away. If you’re unsure what charges you may face due to excess mileage or wear and tear, ask the lease provider for a pre-inspection that would provide an estimate on any repairs and fees.

Some auto manufacturers automatically offer free inspections and repair estimates. You may even be able to have an inspector come to you. Schedule it as soon as possible as the inspection itself usually needs to occur three to two months before your turn-in date.

 

3. Lease trade-in

Trade in your lease to immediately lease or purchase another vehicle. You don’t have to go back to the same automaker to do this. If you use your lease as a trade-in, the retailer essentially buys the car for its residual value. And by doing this, you may be able to score incentives on a new vehicle, such as a lease trade-in bonus and/or a brand competitor or brand loyalty rebate. However, rebates and incentives change from month to month, so you may only be able to see what deals apply to you in the month that you plan to trade in your lease.

At this point you should know how you’re going to buy your leased car — with cash or a loan — and prepare to do so. With one month or less to go before your car lease ends, you should not face any early termination fees or penalties. The lessor shouldn’t charge you, say, $15, for completing the paperwork and buying your vehicle a day early. But read your contract or contact your lease provider if you have any questions.

 

Cash lease buyout

If you do want to buy out your lease in cash, talk directly with your lease provider who will help you arrange the transaction and transfer paperwork. If you’re debating whether to buy it outright or get a loan, consider financing half of it and getting a lease buyout loan for the other half. This would leave some of your liquid assets free either for investing or just as a cash cushion. Only financing half the car’s value would mean a better loan-to-value ratio and a potentially improved rate.

 

Financed lease buyout

Most auto loan approvals are good for 30 days, which is why you want to apply for them when you have about a month left to go on your lease. Apply to a few lenders of your choice, such as your local credit union, a national bank or online lender. Don’t apply to just one place — see what a few lenders offer and take the loan that best suits you

 

Applying may cause a temporary drop in your credit score, but multiple applications don’t hurt your score any more than one, as long as you file all applications within a two-week period. The credit reporting bureaus allow this window of time specifically so consumers can rate shop without undue penalty. Plus, the benefits of shopping around for an auto loan should outweigh any cons.

 

Once you have chosen the right loan offer for you, contact the lender and complete the paperwork process to secure the loan. The lender will coordinate transferring the title and all paperwork. They may send you a check to use to pay your current lender, or they may send a check to the lease provider directly.

This is your deadline. By the end of the day on this date, your buyout, turn-in or trade-in should be completed. If it isn’t and you haven’t arranged a lease extension or other remedy, you may face fees from the lease provider. The severity of the fees will depend on how late you end the lease. For each full or partial monthly period that you keep your leased car without permission, the fee could be similar to your monthly lease payment.

4 times to consider a car lease buyout

When your lease is up, you’re probably in the market for a vehicle. And if you’re looking for a used vehicle, what car is better than the one you’ve had? If you took good care of it, you know it will probably last a long time, whereas buying someone else’s used car may be a riskier investment. Here are four instances when it makes sense to consider going for a car lease buyout.

If you can buy your leased car for less than its market value

If you can buy the car for less than it’s worth on the market, it’s probably a good deal. Take a look at your lease paperwork or contact the leasing company to see what your buyout price is. When you sign for a car lease, the car’s buyout value is written in the contract, so it should be readily available. You may see it referred as the residual value or end-of-lease value by your lease provider. That cost is actually a prediction — how much the car is truly worth at the end of the lease may be higher or lower depending on the market.

To discover its actual, current value, use an industry guide like Kelley Blue Book, Edmunds or the National Association of Automobile Dealers’ guide. When you look up your vehicle, you’ll see a range of values, from retail to wholesale. The retail value is what you would expect to pay for your car if you bought it from a dealership in your current, local market. If your car is worth more than the retail value, you probably have a good deal on your hands.

If it fits your budget

No matter how good a deal looks on paper, it needs to be affordable in real life. If you can afford to buy the vehicle in cash, that’s great! If you need or want a lease buyout loan, shop around for your best rates.

As you look for an auto lease buyout loan, you may notice that shorter-term loans have higher payments and APRs, but charge less in total interest and vice versa for longer-term loans. A potential way to have your cake and eat it, too, is to get a longer-term loan and pay it off quickly so you don’t end up paying as much interest. Of course, this only works if there are no prepayment penalties on the loan. For example, if Lender A offers a 4% APR on a 3-year term and a 2.5% APR on a 6-year term, consider taking out the 6-year loan and paying it back in three years as long as the lender charges no prepayment penalties.

If you’re facing high turn-in fees

If you drastically exceeded your mileage limit, you face significant fees. Different companies charge different amounts for each mile you go over your allotted lease amount. The same can be said of wear-and-tear charges. Rips and tears from the time your dog took a ride in the back seat and dings from traveling down unpaved roads (or that loose shopping cart) may add up to hefty fees. It could make more sense to buy the car in this case. Here’s how you could find out about the fees you may face:

How to handle excess wear and tear. You should be able to get an estimate from a pre-inspection from your leasing company. It could provide you with a bill predicting fees and repairs. If you get the pre-inspection early, you could have repairs made by an independent mechanic who may charge less than the official dealership.

How to handle excess mileage. A pre-inspection estimate would include any mileage overage fees. But if you’d like to estimate how much you may owe, you could search online to find a mileage fee calculator. You’ll need to know how many miles over the allotment you are and the cost per mile. Some lease companies charge a low fee per mile for the first 500 miles of overage, then a larger fee per mile beyond 500 miles. Look in your lease contract to see what the fee is or call your lease provider. Fees can vary depending on the year, make and model of the vehicle.

If it still meets your needs

Sometimes we need different cars at different points in our lives. For example, if your kids are off to college, why stay in a minivan? But if your leased car still fits your lifestyle, why change? If you took good care of it, it will probably last a long time, whereas buying someone else’s used car might be a riskier option.

4 times to avoid a car lease buyout

Other times, it’s best to turn in your leased car and look for a vehicle that better fits your lifestyle or new circumstances.

If your leased vehicle is worth less than what your contract says

You should not buy your leased car if you could go to a dealership and buy the same car (as in the same year, make, model and relative mileage) for a lower out-the-door price than what you would pay to buy your lease. If it would cost you $25,000 to buy your lease and you could buy the same car for $20,000, on the market, it doesn’t make sense to do a lease buyout.

If it isn’t affordable

It may not be affordable for you to buy your leased car. Maybe your household income decreased due to the coronavirus pandemic. Maybe your credit score went down, making the APR on your “new-ish” car pretty high. You may be better off turning in the car and buying one that’s in your new budget. Check out our car affordability calculator to help figure out what you can afford.

If the car doesn’t match your needs

Maybe you moved north and need a car that can better handle the snow. Or, you just had a kid and putting a child safety seat in a coupé isn’t easy. The great part about a lease is that you’re not tied to the vehicle after the lease ends. You don’t have to buy it; you can get something that better matches what’s going on in your life now. See our “best of” lists to find a car that may suit you better.

If it was damaged

If the car was damaged in an accident or a storm, it will be considered worth less than an undamaged one, even if it was repaired. In a lease, you don’t own the car, so the negative impact to its value would only affect you if you bought it.

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