What you need to know for an auto-lease buyout

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Ask a Lender
May 2, 2017 | Updated September 26, 2017


Key Points

Factors to consider in an auto-lease buyout

  • An auto-lease buyout can be a convenient and cost-effective way to purchase a car.
  • Compare the residual and retail value of your leased vehicle to see if the buyback price makes sense.
  • An auto-lease buyout often requires new financingl.

You’re leasing a great car that’s approaching the end of its term. Should you trade it in or buy the vehicle?

An auto-lease buyout often involves taking out a loan to finance the purchase. The decision to buy the vehicle or not depends on its value, whether the car meets your needs and any mileage or purchase-option penalties that you face.

Before you buy

If you are happy with your leased car, consider how the vehicle has performed throughout the lease period and any mechanical issues you have experienced. Take the car for a diagnostic test to determine how it has aged and whether it will suit your future transportation needs.

It also makes sense to compare the fees that would be involved with returning the vehicle — such as charges for going over your mileage limit or a turn-in fee — to the fees for purchasing it, such as any early lease buyout penalties.

Steps to a buyout

Should you decide to purchase the vehicle, don’t reach out to your lessor immediately. Gathering information on the value of your car and available financing options first will help you at the negotiating table.

Compare the residual and retail values of the car

The residual value is the buyback price of the vehicle as outlined by the lessor. Add the purchase-option fee to determine how much it will cost you to purchase the vehicle. Next, calculate the retail value of your car by using online auto-valuation sites such as Kelley Bluebook.

If the retail value is higher than the purchase price, buying out the lease is an easy decision. This is rarely the case, however, as auto leases are structured in a way to ensure the lessor will not lose money when the term is completed. A buyback price of up to $1,000 more than the retail value is considered a smart purchase. Yet an even lower retail value does not necessarily mean that you should avoid buying back the car. There is still room to negotiate a lower buyout price with the lessor.

As the value of used cars depreciates quickly, lessors typically do not want to retain used cars. The number of vehicles returned off lease increased 33 percent from 2015 to 2016, and the average used-car value fell 23 percent during the same period, with further value depreciation expected in 2017. Thus, there is an incentive for the lessor to ink a sales agreement with a lessee willing to buy a vehicle.

Shop around for a loan

Unless you are purchasing the vehicle with cash, you need to obtain financing. Compare lenders and get preapproved for a loan so that you have an idea of the best rates, terms and conditions available to you. As with a new-car purchase, do not accept the first loan package offered by the lessor.

Negotiate with your lessor

Your lessor will contact you at the end of the term to sell you a lease extension, cash in on a turn-in fee or see if you are interested in purchasing the vehicle. Try to negotiate a lower buyback price with the information you have gathered on the car’s value. While some larger dealerships have a no-negotiation policy, many waive the purchase-option fee, which can save you several hundred dollars.

You also can negotiate a lower price by offering to finance the buyout through the lessor’s dealership or pay the asking buyback price in return for a lower interest rate. In addition to the buyback price, remember that sales tax will comprise a hefty part of the cost. Making a large downpayment can help reduce your interest expenses, although not all dealerships will accept this option. But it’s still worth trying to negotiate your downpayment terms.

Buyout with bad credit

Your credit score only comes into play in a lease buyout when you are seeking financing to pay for the car. Because the buyback price of a leased vehicle is normally lower than the price of a new car, it is typically easier to get financing for the former, even if you have less-than-perfect credit.

A history of consistent payments on your lease also will demonstrate your creditworthiness to lenders. Credit scores do relate to interest rates, however, so those with poor credit will likely only be eligible for more expensive loans that may not be cost-effective in the long run.

Information is power when it comes to an auto-lease buyout. By calculating your car’s residual value and what loan conditions you are eligible for, you are much better positioned to negotiate a buyout that makes the most financial sense for you.

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