Is Buying Out the Lease on Your Car Worth It?

Is Buying Out the Lease on Your Car Worth It?
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You love your leased car. You’ve been driving it for three years, putting 28,000 miles – and many memories – on it. You faced no major mechanical problems since you started leasing, and now you’re faced with a decision: Get a second lease on a new set of wheels or do a car lease buyout?

You may also have other options such as buying a used car with cash or getting an auto loan for a new vehicle. Some of these deciding factors are emotional, such as thinking about whether you love your current car. But many play into your budget, finances and the residual value of the vehicle. It’s important to consider all factors before you decide to buy out your leased vehicle.

What Is a Car Lease?

When you lease a car, it is almost like renting it from the car dealership rather than purchasing it outright or taking out a loan to pay for the car. When the lease term is over, you’ll pay what’s called the buyout price for the leased vehicle. You can usually finance these costs with an auto loan from your car dealer or from a third party, such as your bank or credit union.

When you lease a vehicle, you’ll still have to pay taxes, registration fees to the DMV and something called lease origination fees. Lease origination fees usually range from $400 to $900 or so, and they cover the fees required to process the bank paperwork. Sometimes this cost is called an acquisition fee. Your dealer may roll the lease origination fees into your monthly lease payments if you are trying to keep your down payment low. You don’t have to pay a title fee when you're a lessee because the dealership isn’t transferring ownership of the leased vehicle into your name. Some dealers allow you to lease a car with no money down apart from taxes and fees but, just as with a car loan, your monthly lease payments may be higher.

Factors to Consider When Returning A Leased Vehicle

When you return a leased vehicle at the end of the lease contract, the lease termination department of your dealership will evaluate the condition of the vehicle, looking for signs of excess wear and tear. If you have cosmetic or mechanical damage to the vehicle that isn’t covered under the warranty, you could face extra costs associated with the lease return. If you exceeded the mileage limits of your lease contract, you may have to pay per mile for the overage. In addition, you’ll pay something called a disposition fee, which covers the leasing company’s costs to put the vehicle back onto the lot for sale.

It’s important to note that some of these charges may be negotiable, especially the disposition fees. Most dealerships will waive these fees or roll them into your next lease or loan if you are purchasing or leasing another vehicle from the same dealership. Be certain that fees are actually waived – and not just rolled into your next lease or loan – if that’s what you negotiate for. By law, dealers must disclose all charges and fees when you close on an auto loan or lease; it pays to read the stack of papers you’re signing before you drive off in your new wheels.

If you opt for a lease buyout, you won’t have to worry about disposition fees, fees for exceeding the mileage limits or excess wear-and-tear costs.

Emotional Factors Behind Buying Out Your Lease

Sometimes when you lease a car, you fall in love with it. Whether the car fits your needs perfectly because of its size or you just found it to get excellent gas mileage, there are many emotional reasons to buy out a car lease and hang onto your three-year-old car.

If you love the vehicle, consider if you may be better off leasing another vehicle of the same make and model. Automotive technology advances quickly and many vehicles today have better safety features and more amenities for the same price as similar vehicles from just three years ago.

With this in mind, it’s important to go deeper than just the emotional factors and run the numbers when considering a lease buyout.

Read More:How To End a Car Lease Early

Running the Numbers for Buying Out a Leased Vehicle

Returning a leased vehicle may carry several hidden costs, as discussed above, including:

  • Dealer disposition
  • Excess wear-and-tear charges
  • Mileage overage fees

Plus, whether you buy a new car with an auto loan or lease a new vehicle, you’ll face added charges that include:

  • Loan origination or lease origination fees
  • Taxes
  • Title (if buying)
  • DMV fees
  • Down payment

If cash is tight, buying out your existing lease may cost a bit less, because you don’t have to pay disposition fees, excess wear-and-tear charges or excess mileage charges.

However, if you’re taking out a car loan for a lease buyout, you’ll still pay title charges, DMV fees, taxes, loan origination fees and potentially a down payment. Ask your dealer what costs they can roll into the loan, especially if you have a good credit score and can get zero-percent financing.

Understanding Excess Wear & Mileage Limits Charges

When you return a leased vehicle to the dealership, they will let you know what added charges you’ll face. You’ll receive a bill within the next few weeks detailing the added charges. You can always negotiate with your car dealership to have these charges waived – especially if you are leasing or buying a new vehicle from them. You can also dispute the charges after the fact.

There are other ways to minimize excess wear-and-tear charges on the vehicle as well. If you’re present for the inspection, it’s a good idea to be nice to the inspector. Kindness goes a long way and the inspector may ignore minor dents and dings they would normally charge for.

Just as with purchasing a new car with an auto loan, you can negotiate various elements of your lease buyout. Usually, the buyout price is not negotiable, but you can negotiate a lower down payment or have the dealer waive loan origination fees.

Additionally, clean up the vehicle in advance to present it as a well-maintained car. Try to remove any stains from the upholstery and clean the interior and exterior.

However, if your vehicle has mechanical damage, has been in an accident or has other issues not covered by the warranty, you could be facing a hefty bill when you return the car. That’s when you may want to consider buying the car instead.

Of course, you’ll still need to complete the repairs at some point (unless the damage is only cosmetic) to avoid bigger problems or breakdowns in the future. But at least you’ll have something to show for your money – a vehicle that you can enjoy for years down the road.

Finding Out Your Vehicle’s Residual Value

Ultimately, whether it’s a good idea to buy your leased vehicle or not depends on the car’s residual value. New cars lose value quickly, depreciating by thousands of dollars when you drive them off the lot for the first time.

If your car’s residual value, as determined by Kelley Blue Book, is less than the lease buyout price, you may want to consider getting into a newer vehicle instead. You can purchase a similar vehicle for less money than it would cost to buy out your current model.

Read more:What Is a Blue Book Value?

Assuming you don’t get into any accidents with the car and you continue maintaining the vehicle, a car with high residual value should continue depreciating at the same rate.

Plus, it doesn’t make sense to pay the car dealership more than the vehicle is worth, which is what happens if your buyout price is higher than the residual value. Unless, of course, you’re paying so much in excess wear-and-tear charges that the numbers work out.

Calculating the Financial Sense of a Lease Buyout

Let's use a 2017 Toyota RAV4 XLE Hybrid as an example. The car has 30,000 miles, which is under the mileage requirements based on the lease terms. But the car has mechanical damage, which has been evaluated to cost $3,000 to repair. Other than these repairs, the vehicle is in “good” condition and also has new tires.

Kelley Blue Book value estimates this vehicle has an average sale price of $19,871 if sold through a private party and an average trade-in value of $17,308.

Toyota’s price for lease buyout was approximately $20,000. If you subtract the disposition fees to return the leased vehicle, plus the excess wear-and-tear costs, it’s cheaper to buy the vehicle than to return it. Of course, the buyer will ultimately have to pay for those repairs, but at least they have something to show for the money. Plus, they avoid the hassle of choosing a new car or trying to sell the vehicle privately to get the maximum value for their money. They would not have gotten as much by doing a dealer trade-in for the lease.

For many people, the lack of mileage limits can make the decision of buying vs. leasing a car an easy one.

In general, if the car’s residual value is the same or greater than your lease buyout price, plus you’d have to pay extra for excess wear and tear or over-mileage fees, a lease buyout could make sense.

On the other hand, if the car’s residual value is less than your lease buyout plus any additional charges – including dealer disposition fees and wear and tear – you could return the leased car and buy a similar car for less money, either through a dealership or from a private seller.

Benefits to a Lease Buyout

Of course, there are other benefits to buying out your lease rather than purchasing someone else’s used vehicle of a similar make and model. You know the maintenance history of the vehicle and what it’s been through.

Plus, if you really love the car, it’s your car. At the end of the loan term, you’ll own it. And, you don’t have to go through the hassle of shopping for a new vehicle and finding something that is a good value that you love as much as your current leased vehicle.

Negotiating the Terms of Your Lease Buyout

Just as with purchasing a new car with an auto loan, you can negotiate various elements of your lease buyout. Usually, the buyout price is not negotiable, but you can negotiate a lower down payment or have the dealer waive loan origination fees.

You can also negotiate the price on an extended manufacturer’s warranty for the vehicle or pre-paid maintenance costs. It may be worthwhile to shop around for a lower price on an extended warranty or forego the warranty altogether and simply maintain an emergency savings account to pay for unexpected car repairs.

How Do You Buy Out a Lease?

If you’ve decided a lease buyout is the best choice for you, it’s easy to execute the deal. First, read your latest lease statement to find the buyout price for your vehicle. Then, shop around for the lowest financing rates. Remember, your auto dealership may not always have the best deal for a car loan.

To finalize your car lease buyout, you’ll make the agreed-upon down payment – plus taxes, title and fees – and the dealer will transfer the title to your name. You can drive home from the dealership with the same vehicle you arrived in – except now it belongs to you and you don’t have to worry about watching your mileage. For many people, the lack of mileage limits can make the decision of buying vs. leasing a car an easy one.