Is buying out your lease worth it? Run the numbers first

Whether a lease buyout pays off depends on one comparison: the price the leasing company wants against what the car would fetch on the open market. Car and Driver, in its guide to lease buyouts, stresses that working out the price and the associated costs is only part of the decision.

What a buyout is, and when it can happen

A lease buyout means purchasing the vehicle you have been leasing, either when the lease term ends or before. To do it, you pay what is known as the buyout cost. The first step is to read your lease agreement and confirm that the option is allowed at all.

A buyout at the end of the term is the simpler route. An early buyout, meaning a purchase before the contract runs out, is less common and can get expensive if the leasing company adds early termination fees on top of the buyout price. Car and Driver notes it can still be the best choice for someone worried about excess wear and tear or mileage fees under the contract.

Timing matters too. If you want to buy a year before the lease ends, check the contract for extra early-termination charges. If there are any, waiting until the lease expires may be the cheaper path. It is customary for the leasing company to contact you within 90 days before expiry, and Car and Driver suggests waiting for that first contact, which could make the lessor more open to negotiating than if you announce your intentions early.

Where the buyout price comes from

The buyout cost is not a single number pulled from the air. It is assembled from several parts:

• Residual value: the car’s expected worth at lease end, accounting for depreciation during the term. The leasing company sets it, you can see it before signing, and the agreement typically states it.
• Taxes: depending on where you live, local and/or state used car sales taxes may apply.
• Registration costs: licensing or registration fees for putting the car in your name.
• Purchase option fee: some leasing companies charge one.
• Remaining lease payments: these can be folded into the price, especially in an early buyout.

Residual value is the biggest piece, and leasing companies usually do not negotiate it. Many agreements include a non-negotiation clause on the buyout price, though Car and Driver says it costs nothing to ask. Some lessors may offer financing discounts or purchase incentives, or waive the purchase option fee.

Comparing the price with what the car is worth

Market value is what a dealership or other buyer would pay for the vehicle. Car and Driver points to its own car value calculator, which estimates it from location, make and model, age, condition, features and mileage. You can also look at the retail value, what a dealer would charge, and the wholesale value, what a dealer might pay at auction, and set both against the residual value.

In that example, trading the car for a new lease might be the better move, because paying more than the car is worth rarely makes financial sense. If the market value instead exceeds the buyout price, a buyout may be worthwhile. Car and Driver adds that attachment to the car can justify buying even when the buyout cost tops its value, as long as you accept that trade-off.

Paying for it

A lease buyout loan works like an auto loan, with set monthly payments, an annual interest rate and a fixed term. If you have savings, you can pay the buyout in cash instead.

Your current leasing company may offer financing, but you are not obligated to use it. Banks and credit unions can be contacted to compare loan terms, and some offer competitive rates, though you will not know until you shop around. Your credit score plays a part: the higher it is, the more likely a lender is to offer a lower interest rate.

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