A lease buyout loan might be a smart move if you’ve recently leased a car and want to keep it. Of course, this depends on your car’s condition, your current financial situation, and the loan terms you receive.
In this article, we will explain how a lease buyout loan works, the factors to consider before opting for a lease buyout, how to get started with the process, and tips for comparing loan providers.
What is a lease buyout loan?
At the end of your lease, you may be able to return the car, lease it again, or buy it outright. You’ll have to check your lease contract because some lenders won’t give you the option to buy your leased car.
If you do have the option to buy out your auto lease, you can either pay cash for it or finance the remainder of the balance. Because you’re buying out the manufacturer, this is known as a car lease buyout loan.
If you need to finance the balance, you can do this through a bank, finance company, online lender, or credit union. The downside to leasing the vehicle is that you will end up paying additional interest and taxes.
Can I buyout my car before my lease is up?
Most leases will require that you wait until the end of your lease contract to purchase the car. However, some lenders will let you buy the vehicle early. But you should proceed with caution because there are some significant disadvantages to this.
First, most lenders will charge you early termination fees if you end the leasing contract early. Depending on your lender, these purchase option fees could end up being pretty high.
Many people choose to lease a vehicle because the payments tend to be lower. If you buy the car early, your remaining lease payments will increase since the vehicle will be worth more. Waiting until the end of the lease agreement will keep these payments as low as possible.
Finally, anyone who leases a car still has to pay sales tax and registration fees, just like buying the car outright. And when you purchase a vehicle you were previously leasing, you have to pay these fees all over again. But if you wait until your auto lease agreement is up, they’ll be lower because the car is worth less money.
Benefits and Drawbacks of Lease Buyout Loans
Before diving into the factors to consider before taking out a lease buyout loan, it’s essential to understand the benefits and drawbacks of opting for a lease buyout.
Benefits
- Familiarity with the vehicle: You already know the history and condition of the car, which reduces the uncertainty associated with buying a used vehicle from an unknown source.
- Avoid excess wear and tear charges: If your leased car has significant wear and tear, buying it can help you avoid costly fees when returning the vehicle.
- No need to search for a new vehicle: Buying your leased car can save you time and effort associated with finding a new car that fits your needs and budget.
- Potential for equity: If the car’s market value is higher than its residual value, you might have some equity in the vehicle, making it a better investment.
Drawbacks
- Higher interest rates: Lease buyout loans may have higher interest rates compared to traditional auto loans, increasing the overall cost of the loan.
- Limited lender options: Not all lenders offer auto lease buyouts, which may limit your financing options.
- Additional taxes and fees: When you buy out your lease, you’ll have to pay sales tax and registration fees again, increasing the overall cost of the vehicle.
6 Things to Consider Before Taking Out a Lease Buyout Loan
When does an auto lease buyout loan make sense? Here are six questions you should ask yourself first.
- Does your lender offer lease buyouts? Not all lenders offer lease buyout options, so you’ll need to do some shopping around to find one that does.
- Does it make financial sense? The fees will be higher if you choose a lease buyout, so you should make sure you can afford it. Use an auto loan calculator to run the numbers, figure out what your monthly payments will be, and whether it fits in your budget.
- Does the car fit your lifestyle? The kind of car you need will change throughout your life. You should spend some time thinking about your current lifestyle and whether your leased vehicle still fits.
- Will you take good care of the car? Buying or leasing a used car is always a gamble because you don’t know what you’re going to get. But if you’ve taken excellent care of your current car and it’s in good shape, it may make sense to hang onto it.
- Will you incur high fees for turning it in? One of the downsides to leasing a car is that you can quickly rack up high fees. If you have excess mileage or wear and tear, you could get hit with hefty fines. In that case, it may make sense to just keep the car.
- Is it a good deal? And finally, you should determine whether it’s a good deal for you to buy the car. Is the car worth more than what you and the lender originally agreed to? If it is, then buying your leased vehicle is probably a practical option for you.
5 Steps to Getting Started
If you decide that a lease buyout is the right choice for you, here are five steps you can take to get the process rolling.
1. Contact the Leasing Company
If you want to buy out your lease, don’t wait until the last minute to contact the leasing company. Ideally, you should contact them at least two to three months before your lease agreement is up.
Tell the leasing company you’re considering purchasing the car, and they can walk you through how you can get started. Make sure you ask the following questions:
- What is the car’s residual value?
- What is the current market value of the car?
- What fees or taxes will I be responsible for?
2. Decide How You’ll Purchase the Car
Once you know the car lease buyout price, you need to decide whether to pay cash or finance the remaining amount. Paying cash is the simplest route you can take. You’ll transfer the funds to the leasing company, and then they’ll mail you the title and registration.
If you need to finance the vehicle, you’ll have to shop around so you can find the best deal possible. Make sure they understand you want a lease buyout loan, not a regular auto loan.
3. Compare Lease Buyout Loan Providers
When shopping for a lease buyout loan, it’s essential to compare different providers to ensure you’re getting the best deal possible. Consider the following factors when comparing loan providers:
- Interest rates: Look for lenders offering competitive interest rates, which will directly affect your monthly payments and the total cost of the loan.
- Loan terms: Evaluate the loan repayment period, which can range from 12 to 72 months or more. Shorter loan terms typically have higher monthly payments but lower overall interest costs, while longer terms have lower monthly payments but higher overall interest costs.
- Prepayment penalties: Some lenders may charge prepayment penalties if you pay off your loan early. It’s important to find a lender that doesn’t charge these penalties if you plan to pay off your loan ahead of schedule.
- Customer service: Choose a lender with a reputation for excellent customer service and support throughout the loan process. Read customer reviews and ask for recommendations from friends or family who have recently gone through a similar process.
4. Apply for and Choose a Lease Buyout Loan
Once you find several viable options, you should apply with multiple online lenders and see what they offer you. Most lenders will do a soft pull on your credit report, which won’t damage your credit score. You should choose the lender that offers the lowest APR and most favorable repayment terms.
5. Close on the Loan
Once you’ve worked out the payment details, you’re ready to close on your car loan. Your lender and local DMV can advise you on how to transfer the title. But if you take out an auto loan, the title will remain in the lender’s name until it’s paid off.
Summary
Depending on your financial situation, an auto lease buyout could be a suitable option for you. The best way to find out is to run the numbers and explore your options. You may find that it makes more sense to lease a different vehicle.
Keep in mind that lease buyout loans tend to come with higher fees and taxes. So make sure you do your homework and negotiate pricing and loan terms whenever possible. By following the steps outlined in this guide, you can make an informed decision on whether a lease buyout is the right choice for you.
Frequently Asked Questions
Can I refinance a lease buyout loan?
Yes, you can refinance a lease buyout loan just like you would a traditional auto loan. Refinancing could potentially lower your interest rate or adjust the loan term, which could reduce your monthly payments. However, it’s essential to carefully consider any associated fees and the overall cost of refinancing before making a decision.
Can I trade in my leased car for another vehicle?
Yes, trading in your leased car for another vehicle is possible. You will need to buy out your lease first, and then you can use the car as a trade-in towards the purchase or lease of another vehicle. Keep in mind that you will still need to pay any applicable taxes and fees associated with the lease buyout and the trade-in process.
Can I negotiate the price of my leased car at the end of the lease?
The residual value of your leased car, which is the lease buyout price, is typically predetermined at the beginning of the lease. However, it’s possible to negotiate the buyout price in some cases, especially if the car’s market value is lower than the residual value. It’s worth discussing the possibility of negotiating the purchase price with your leasing company before committing to a lease buyout.
Can I lease another car after buying out my current lease?
Yes, you can lease another car after buying out your current lease. Once you’ve completed the lease buyout process and paid off any associated fees and taxes, you’re free to lease or purchase another vehicle as you see fit.
Leasing another car after a lease buyout could be a viable option if your needs or preferences have changed, and you want to drive a different car without the long-term commitment of ownership.
What happens if I decide not to buy out my lease?
If you decide not to buy out your lease, you have a few options when the lease term ends:
- Return the car: You can simply return the car to the leasing company and walk away, provided you’ve met all the lease terms and conditions, such as mileage limits and wear and tear guidelines.
- Lease a new car: You can return your current leased car and lease a new vehicle from the same company or a different one. This option allows you to drive a new car with updated features and technology.
- Purchase a different car: Instead of buying out your lease, you can return the car and purchase a new or used vehicle, either through financing or paying cash.
Each of these options has its pros and cons, so it’s essential to consider your personal preferences, financial situation, and future needs when deciding what to do at the end of your lease.
