Should I Buy Out My Car Lease? Find Out Here
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When you signed the lease contract on your new car, it felt like getting the best of both worlds.
Not only did you receive lower monthly payments versus financing a vehicle, but you also gained the privilege of driving a new vehicle with the latest features and a factory warranty. And since lease contracts typically last several years, you looked forward to enjoying your car for an extended period.
But though you agreed to lease your vehicle, now you'd like to keep it beyond the original contract. Maybe you've made some good memories while driving it and want to keep it for many years. Or perhaps it drives better than you'd expected and provides you with everything you need, and you don't plan on purchasing anything else down the road.
Whatever happens to be your rationale for wanting to keep your leased vehicle, one option you have is paying the buyout price. What entails buying out a car lease? Let's look at the details of auto leasing and when buying out a car lease is a good option.
Auto leasing explained
Leasing a car is similar to renting real estate. Whether leasing a car or an apartment, you enter into a contract for some time, agree to make lease payments, and promise to maintain it in good condition.
Also, like leasing real estate, you return the property to its owner or lessor at the end of an auto lease term and no longer enjoy the privilege of using it.
Car leases contain provisions requiring you to take good care of a vehicle and return it in acceptable shape. Lease contracts mandate that cars be driven normally and not be subject to extra wear and tear. When you return a leased car, if any damage is present, additional charges apply.
Auto leases have several provisions that decide your monthly payment amount. Examples are the capitalized cost, residual value, money factor, and mileage limit.
Just like when you buy a car, the capitalized cost on a lease is an agreed-upon purchase price.
Also known as the cap cost, the capitalized cost is a significant factor in your lease contract and goes a long way in determining your monthly payment. Not only that, but the cap cost can also influence other terms on a lease contract, like the mileage limit and residual value. Because of this, obtaining an advantageous cap cost helps you get a better deal on a lease. One way to reduce the cap cost is to make a down payment via cap cost reduction.
The money factor on an auto lease is like the interest rate on a car loan. Also referred to as the lease factor, the money factor is a financing charge added onto each monthly payment.
The yearly mileage limit is one example of how leases differ substantially from auto loans. During a car lease term, the contract specifies a set number of miles driven each year. Typical mileage limits on an auto lease are 10,000, 12,000, and 15,000. The fewer miles per year you agree to drive, the lower your monthly payment, with the opposite holding true for higher mileage amounts. And if you turn in a car at the end of a lease contract with extra mileage, you'll be subject to additional fees.
Some lease contracts contain a buyout amount, which allows you to purchase the vehicle during or at the end of the term. The car's residual value largely determines the buyout price. The lessor determines the residual value by considering the contract's mileage limit and depreciation.
Though car buying can be fun, selling your old one is a hassle. Whether you have a Honda, Toyota, or BMW, selling a vehicle takes up your necessary time. You have to take pictures, post ads, and answer phone calls from prospective buyers. But Shift makes selling your current vehicle easy. All you'll have to do is enter the make, model, year, and mileage on Shift's easy-to-use website, and you'll instantly receive a purchase offer that's valid for seven days. You can get a fair offer, better than at the dealership, driven by powerful machine learning algorithms and tons of data. And with Shift, there is no need to spend the extra time waxing and washing the car. A little dirt will not affect the quote, and we fully detail the cars ourselves anyway before listing them for sale.
Buying out a car lease
If you decide you'd like to keep your leased vehicle around beyond the end of the contract, buying out a car lease may be a worthwhile option.
The lease buyout amount considers depreciation and the agreed-upon mileage limit to arrive at a price. During the lease agreement or at its conclusion, you can pay this total to gain possession of the vehicle.
If you decide you'd like to retain your leased car for many years to come, look at the details of your lease contract and locate the residual value. This is the amount you'll need to pay to buy the car and drive away free and clear, with no more mileage limits or other restrictions.
Once you know the residual value, calculate how many payments you have left on the agreement, if any, and add them to it. Say the residual value is $20,000, and you have 10 monthly payments of $300 left. To complete the lease buyout, you'll pay $23,000.
In addition to those amounts, you'll usually need to pay sales tax. And your lessor might levy additional charges like a purchase option fee.
If you're like most car buyers, you'll want to finance your purchase. A car lease buyout loan may make the most sense for you when completing a lease buyout.
One major perk of buying out a car lease is not being responsible for the end-of-lease fees for additional mileage or extra wear and tear. Now that you own the vehicle, you have the freedom to drive anywhere and maintain the car as you please.
Locating the right financing for your vehicle purchase takes up your valuable time and energy. Who can you trust to get you a great deal on financing? Shift works with a network of trusted lenders who compete for your business, so you get the best deal on financing. You can buy any of Shift's cars directly online from the comfort of your home, know it has no hidden issues (from our 150-point inspection) and get a fair, up-front price.
Buying out a car lease: what to consider
Even if you like your leased vehicle, buying it for more than it's worth would be a poor financial decision. Before you decide on buying out a car lease, comparing its market value to the lease buyout price helps you make a wise choice.
And if your leased car has a history of mechanical issues, it's probably a good idea to get behind the wheel of something else so that you have reliable transportation mile after mile.
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April 15, 2022
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