If you’re at end of your car’s lease, you may be wondering if you should do a lease buyout.
In this article, we’ll look at the three times money expert Clark Howard says buying out your lease can make sense.
Lease buyout: Here’s when it makes sense
When you’re at the end of your car’s lease, you’re at a crossroads.
For starters, you can turn the vehicle back into the dealer and jump into a new leased ride. By doing that, you’re on a constant treadmill of always leasing and never owing. You’re also continually subject to the dangers of leasing, which we’ve plotted out here.
You could also just turn the car in and shop for an new or used car to buy. Buying a reliable used car is Clark’s recommendation.
The other option would be to buy out your vehicle for its residual value. The residual value is a set amount of money spelled out in your lease contract for which you can purchase the car free and clear at the end of your lease.
Clark says doing a lease buyout and paying that residual makes most sense in couple of situations right off the bat:
- When you’ve exceeded your mileage allowance
- When you’re way under your mileage allowance
How mileage allowances can influence your lease buyout decision
To begin with, let’s look at the first situation. Lease agreements come with mileage allowances, which is the amount of miles you’re allowed to put on the vehicle while you’re leasing it. And there are penalties for going above your mileage allowance.
For example, if you drive 15,000+ miles annually and your lease only allows for 12,000 miles each year, you’re going to have to fork over extra cash to pay for the difference. It’s not uncommon to pay 20 cents/mile over your mileage allowance. So in this example, you’d be responsible for an extra $600 annually, or $50 monthly.
So maybe you’re facing a huge per mile penalty for being over your mileage allowance when you turn your vehicle back in. That’s one of two times you should automatically look at doing a lease buyout.
Meanwhile, the second case where you should think about paying the residual is when you’re way under your mileage allowance.
“You’re leaving money on the table that you essentially already paid for under the terms of the lease you agreed to,” the consumer champ notes.
Other lease buyout considerations
A third circumstance where buying out your lease can make sense is if you really like car and the residual is within reason for the vehicle’s value. You can check vehicle values at Edmunds.com, KBB.com and NADA.com.
“Then it makes a lot of sense to buy the vehicle,” Clark says. “You know the vehicle’s history, you’ve been the driver and you know how it’s performed. So, you eliminate a lot of the unknowns you would have with most used vehicles.”
You can also check out this end-of-lease calculator for additional confirmation that you’re making the right choice.
Of course, numbers alone don’t tell the whole story. You have to actually like the vehicle if you’re thinking about owning it after your lease ends!
“If you hated your ride, regardless of the economics, you don’t want to go forward with a buyout at end of lease,” the money expert notes.
Negotiating a lower lease buyout price
You may find you have negotiating power when it comes time to pony up for the residual value, depending on how your lease financing was originated and by whom.
If the lease was done by a bank, the banks don’t want the off-lease vehicles back at all. They’re not in the used car business, after all. So you can usually negotiate a discount from what the residual purchase price would be, Clark says.
However, that won’t be the case if you got your lease through one of the automakers’ captive finance companies (Honda Financial Services, Toyota Financial Services, Ford Motor Credit Company, etc.). You’ll likely find you have no wiggle room with them on price.
Leasing is not for everyone. In fact, there are only a couple of circumstances where Clark ever recommends leasing.
If you’re really concerned with your money, consider buying a two or three year old used vehicle and holding it for a minimum of three to four years. We’ve got a guide to buying used cars here.