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When in the market for a new vehicle, you might have decided to try leasing. After all, the monthly payments might be lower on a lease versus a loan.
But there will come a time during the end of the lease contract when you’ll need to make a decision on whether to turn in the car, seek a new lease on a different vehicle or offer to buy your current car from the leasing company.
If you decide you want to buy the vehicle, you’ll likely need a lease buyout loan. Here’s what you should know.
How Does a Lease Buyout Loan Work?
A car lease buyout is similar to a used car purchase—only this time, you’ve already been driving the vehicle for the past few years. A few months before your lease reaches its termination date, you’ll be contacted by the leasing company to review your standard lease-end options and choose one of the following:
- Walk away from the car at the end of the lease contract by simply turning the vehicle back into the leasing company.
- Buy the vehicle from the leasing company for cash.
- Buy the vehicle with a lease buyout loan.
But before the leasing company reaches out, you should do your own research and review the leasing agreement you signed. The agreement will contain the amount of the residual value of the vehicle. That amount is what the leasing company says is the value of the vehicle in three years (at your lease termination). This is a highly-educated estimate called the residual value.
Tip: Before you consider a lease buyout loan, check that buying the vehicle at the end of the lease term is an option offered in your lease agreement since it won’t always be an option.
How to Get a Lease Buyout Loan
Some lease agreements may prohibit buyouts in the first few months or the last few months of the leasing agreement.
You don’t want to be faced with a situation where you want to initiate a lease buyout with two months to go on the lease term, only to be told your contract prohibits buyouts in the final few months of the lease.
Banks, credit unions, online lenders and finance companies offer lease buyout loans. It’s best to shop around for your loan so that you can compare annual percentage rates (APRs) and terms.
The actual loan you’re preapproved for will be based on your income, expenses, credit score, APR, loan term and value of the vehicle as a used car. Because a lease buyout loan is essentially a used car loan, the interest rate and fees can be higher than on a new car loan.
If you decide on a lease buyout, follow these steps to start the process:
- Review your original leasing agreement. In addition to mileage allowances and normal wear and tear rules, the lease contract will stipulate when a buyout is allowed under your agreement. This will specify if and when you can purchase the vehicle—whether three months out or closer to the lease end date.
- Find out the current market value of the vehicle. Make sure you know the current market value of the vehicle versus the residual value. This will help you in negotiating both your preapproved loan and your purchase price.
- Contact the leasing company. Contact the leasing company and inform them you want to purchase the vehicle for the residual value price in the leasing agreement.
- Compare lease buyout loan options. You can start with your own bank or credit union to see if they offer lease buyout loans. But not all financial institutions offer lease buyout loans. If they don’t, check out other banks, credit unions or online lenders and compare your options to find the one that works for you.
- Sign the offer. Lastly, you’ll enter into negotiations with the leasing company. You’ll agree upon a fair price for the vehicle that’s acceptable to all parties and finally sign an agreement or contract.
Your preapproved loan will be based on the residual value amount in the lease agreement plus the total amount of the remaining two or three payments you still owe to the leasing company. So, your estimate of the lease buyout amount is the residual value, plus the number of months remaining on the lease and the standard lease termination fees.
Keep in mind that the lending institution providing the lease buyout loan will hold the title as collateral on the loan, which is typical with new and used car loans.
How to Negotiate a Car Lease Buyout
Buying your leased vehicle should be a simple negotiation because you signed a leasing agreement at the start of the lease that contains the residual value of the vehicle at lease termination.
Nevertheless, you need to know the vehicle’s current value in today’s market. You can research the current value on sites like Edmunds, Kelley Blue Book or the National Automobile Dealers Association.
If the predicted residual value is:
- Lower than the market value: You should make plans to tell the leasing company you’ll buy the vehicle for the residual value amount, as stated in the lease agreement.
- Higher than the market value: You’ll have to negotiate a buyout price with the leasing company. But keep in mind, they might want to resell the off-lease vehicle to an auction to take advantage of the uptick in the used vehicle pricing, so be prepared to offer more than the wholesale price.
Given today’s market, your leased vehicle’s residual value is probably less than the current market value. That’s why it would be a good deal for you to buy the vehicle for the signed leasing agreement’s residual value price. The leasing company is expecting to get the wholesale price of the vehicle that they would get at a dealer auction.
What to Consider Before Buying Out Your Car Lease
There are a few factors that might contribute to your decision to buy out your lease.
- You like the vehicle
- You’re getting a great deal on the predicted residual value of the vehicle
- You’ve exceeded the mileage limits for the vehicle and are faced with paying the agreed-upon penalty
- You’ve exceeded the amount of normal wear and tear, and will need to pay for expensive paint and body repairs
If you purchase the vehicle at the end of the lease agreement, you won’t have to worry about the expense of exceeding the mileage limit or the wear and tear restrictions because you’ll now own the vehicle.
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