A lease buyout allows consumers to purchase a leased vehicle prior to or at the conclusion of the end of the contract term. You may be able to pay cash and purchase the car outright, or you can take out an auto loan to finance the purchase. The latter tends to be the more popular option, especially if the buyout amount is significant.
If you’re interested in a lease buyout, you have financing options. You can often secure the best interest rates and lower fees by working with a credit union.
What Is a Lease Buyout?
As we said in the opening, a lease buyout is a process in which you purchase the leased vehicle either during or at the end of a lease term. Essentially, you’ll just be buying a vehicle you’re already leasing and driving.
Early Lease Buyout vs. End-of-Lease Buyout
An early lease buyout is when you decide to purchase the lease before it expires. If you buy out the lease early, you’ll typically be on the hook for any remaining lease payments and the car’s residual value. Residual value is the predetermined, estimated value of a vehicle at the end of its lease term, based on expected depreciation.
Conversely, in an end-of-lease buyout, you simply act to purchase the vehicle at the end of the lease term. Rather than have to make any lease payments, you’ll just have to pay the residual value, typically with the help of an auto loan.
In either lease buyout option, you may be on the hook for additional fees.
Why Consider a Lease Buyout?
There are several reasons to consider a lease buyout:
- You’re over your mileage limit: Most leases require your mileage to be under an agreed-upon limit. If it is over, you have to pay the excess fees.
- Excess wear and tear: You might consider a lease buyout if your vehicle has excessive wear and tear that you’d have to pay for if you turn it in.
- The market value of your vehicle exceeds its residual value, creating instant equity. This typically happens if you’re significantly below the mileage limit or if your leased vehicle remains in excellent overall condition.
- You’re familiar and comfortable with the vehicle and its current condition.
How to Buy Out a Car Lease: Step-by-Step Process
Thinking of buying out your car lease? Here’s a look at the steps to follow:
Step 1: Review Your Lease Agreement
Start by reviewing your lease agreement. Understand what your vehicle’s end-of-lease residual value is and if you’ll also be responsible for other fees. Also, check whether there’s an early termination clause. If you have any questions about the specifics of your lease agreement, contact the leasing company for clarification.
Step 2: Calculate Your Lease Buyout Price
The next step is calculating your buyout price. The two most important components are residual value and, if you’re buying out early, remaining lease payments. You’ll also want to factor in any other fees or taxes.
Once you know the buyout price, we’d suggest checking an industry resource, such as Kelley Blue Book or Edmunds, to confirm the market value and see if you’re getting a good deal, especially when your lease expires.
Step 3: Explore Your Lease Buyout Financing Options
Most drivers will opt to finance their lease buyout. Viable lending options include banks, credit unions or dealership financing.
While we encourage drivers to shop around for the best rates and terms, credit unions are often the best choice. Credit unions are non-profit financial institutions that take a member-focused approach to service. This often translates to lower rates and more favorable terms.
Step 4: Complete the Buyout and Take Ownership
To complete the process, you’ll need to formally notify the leasing company of your intent to purchase. You’ll file the appropriate paperwork and then transfer the title and registration. You should also contact your insurance agent to see if any adjustments to your coverage are necessary.
Understanding Lease Buyout Fees and Costs
When buying out a lease, you may have to budget for various fees and costs beyond residual fees and remaining lease payments:
- Purchase option fee: This fee, often several hundred dollars, allows drivers to exercise the option to buy out the vehicle.
- Documentation/administrative fees: These fees are common when processing through a dealer. They can range anywhere from a few hundred dollars to $1,000.
- Early termination fee: This may include any remaining payments if you purchase during the loan term.
- Sales tax: Some states might tax the entire buyout, while others might tax only the difference between the market value and the residual value.
- Title and registration: These are the costs associated with transferring the title and registration from the leasing company to the new lender.
A list of potential fees for your specific lease can be found on your original lease agreement. If you don’t have a copy, contact your dealership to have them send you one”
Pros and Cons of a Lease Buyout
There are both pros and cons of buying out a lease. Here’s a look at them, starting with the pros:
- Avoid end-of-lease fees (i.e., excess mileage, excess wear and tear).
- You’re buying a known asset that you’ve been driving for several months or years.
- You can customize the vehicle to your liking.
- It’s often cheaper than leasing or purchasing a new vehicle.
Now, the cons:
- You’re responsible for repairs and maintenance, as any coverage under your lease has lapsed.
- The vehicle may depreciate faster.
Why Choose a Credit Union for Your Lease Buyout Loan?
Credit unions, like Island Federal, offer an ideal option for your lease buyout loan thanks to our member-focused business model, which enables lower interest rates and more favorable terms than other lenders. At Island Federal, we offer competitive lease buyout rates, often lower than the national average that you’ll find at most other lenders.
Ready to Buy Out Your Lease? Let’s Make It Happen
Are you ready to buy out your lease? Island Federal can help you make it happen.
While we encourage you to do your research, compare and negotiate, we’re standing by to make the buyout process as easy and streamlined as possible. Contact us today for more information and to schedule a consultation.
FAQs About Lease Buyouts
Can you buy out a car lease early?
Yes, though buying out a lease early often means you’ll have to pay all remaining lease payments, the residual value and any associated fees.
What is the process of buying out a leased car?
Start by reviewing your lease agreement and looking for the “purchase option price.” Contact your leasing company to confirm the final payoff amount, including any fees and taxes, as well as any remaining payments. If you’re not paying cash, you’ll likely need to secure financing before finalizing any buyout.
How is a lease buyout price calculated?
Lease buyout prices are determined by adding the vehicle’s residual value (e.g., estimated future worth) to any remaining monthly payments and fees.
What is a lease buyout loan and how does it work?
Lease buyout loans allow drivers to take ownership of a vehicle before the lease ends. Essentially, you’ll finance the vehicle’s residual value, any remaining lease payments and any fees. To complete a buyout, most drivers apply for a lease buyout loan to cover the purchase price of their vehicle. If it’s approved, the new lender will pay the leasing company and you’ll pay the lender.
Is it better to buy out a lease at the end or early?
Buying out a lease is usually better at the end of the contract to avoid excess fees and better understand the vehicle’s residual value. However, early buyouts are ideal if you’re over mileage or if the vehicle’s market value significantly exceeds your payoff amount.
Can I negotiate the residual value on a lease buyout?
The residual value is typically fixed in the lease contract. That said, you could sometimes negotiate the lease buyout price, such as waiving or reducing any fees associated with the buyout.
What fees are involved in a car lease buyout?
Fees may include sales tax, title transfer fees, documentation fee, inspection fees and potential early buyout fees.
How does a credit union lease buyout loan differ from dealership financing?
Credit unions typically offer lower interest rates, reduced fees and more transparent terms compared to working with a dealership.