(iSeeCars) – If you’re currently leasing a car and nearing the end of your lease term, you might be wondering what you should do next. Given the shortage of new car inventory, available new cars are selling above MSRP and car leases are also significantly more expensive than they were a year ago. And while buying a used car was once a smart financial decision, used car prices are at record highs and in many cases are more expensive than new cars.
In light of the current new and used car market, buying out your car lease might be your smartest option. How does the process work and should you buy out your car lease? We have the important answers.
How a Lease Buyout Works
If you’re leasing a vehicle, most finance companies will include a buyout option as part of your lease agreement. Your auto lease contract will state the end-of-lease purchase price based on the car’s residual value, which was estimated when you signed your lease. Leasing companies will often contact you near the end of your lease term to communicate your lease-end options, which will include either the buyout option or returning the vehicle to the dealership.
Residual Value in Today’s Market
Dealers calculate a vehicle’s residual value based on its projected depreciation, and this value is locked in at the beginning of a car’s lease. And because the start of your lease was before the pandemic and the ensuing supply chain issues, that buyout price is likely well-below current market value. So while buying your car at the end of the lease used to only be advantageous in some situations, the current market has actually made it potentially lucrative to purchase your leased vehicle in many instances. According to a recent iSeeCars analysis of the best leased cars to buy, the average three-year-old used car is worth 35.7 percent or nearly $8,000 more than its residual value estimated at the beginning of its leasing term. That means that you could purchase your leased vehicle and either sell it for a profit, or you can continue driving your lightly used car at a price well below market value. Keep in mind that if you decide to sell your car, you will have to purchase a new one in this elevated market, which will likely absorb most of your profit.
Understanding the Value of Your Vehicle
Here’s how you can compare the vehicle’s residual value or buyout amount with its market price. To calculate the market value of the vehicle, you can use pricing tools like the iSeeCars free VIN Check, Kelley Blue Book, or Edmunds. Be sure to check your original contract for extra fees like a purchase option fee to determine the total amount you will be paying for the vehicle.
And be extra vigilant about dealer or finance company “add on” fees that were not specifically called out in your lease contract. Dealers are well aware of today’s elevated used-car values, and some are trying to take advantage of the situation by charging extra fees, either to make more money during the lease buyout process or to discourage consumers from buying the vehicle…so the dealer can acquire it and sell it for a profit themselves. Cross-check any fees during the buyout process with the original lease contract, and dispute any fees that don’t match.
Can I Finance My Lease Buyout?
You can finance your lease buyout just as you would a regular used car purchase. The dealership will be eager to offer you financing, but you should also examine outside financing options as you would for a typical car loan. That means comparing interest rates from other lenders including banks and credit unions to see who will give you the best rate on your car lease buyout loan. Some lenders even offer auto loans specifically for lease buyouts. Keep in mind that the shorter your loan term, the more you will save on interest payments, but your monthly payments will be higher. That means you should opt for the shortest loan term you can afford. Also, your credit score will determine your loan rate, so make sure it is in good standing in order to get a competitive rate. If you have a poor credit score, you should consider having a co-signer.
Other Things to Consider
Anyone who has leased a car knows about the extra fees that often come at the end of the car lease. These fees include going over the mileage limits or any excess wear and tear your vehicle may have like scratches or dents. Buying out your lease will get you off the hook for these fees, so if either situation exists with your lease it is yet another reason to buy your car when the lease ends versus returning it.
Some lease agreements offer early lease buyouts which allow you to buy the vehicle before your term expires. Make sure you refer to your leasing agreement to see if you will have to pay extra fees for an early buyout. If there are fees involved, it’s likely a smarter decision to wait until the end of your lease.
Buying out your vehicle lease can be a lucrative way to save on a lightly-used vehicle in today’s market. You’ll also avoid the low inventory and markups on new cars. What’s more, you can enjoy the savings that come along with buying a used car in today’s market while avoiding the guesswork about how the car was driven and maintained by its previous owner. You can even sell your vehicle to a private seller for a profit if you don’t want to keep driving it. So if you are nearing the end of your lease, you should at least consider purchasing your vehicle instead of taking out another lease or buying a new or used car to replace it.
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If you’re ready to start the car buying process, you can search over 4 million new and used cars with the iSeeCars.com car search engine that helps shoppers find the best car deals by providing key insights and valuable resources, like the iSeeCars free VIN check and Best Cars rankings.
This article, Buying Out a Car Lease: Is it a Good Idea?, originally appeared on iSeeCars.com.