For many drivers, the end of a car lease means turning the car in and signing a new lease. But there is another option: buying out a car lease.
You might consider buying out your car lease to save money, hold on to a car you enjoy driving or avoid locking yourself into a new lease term. Whatever the reason, there are several things to know about buying your leased car and how it might impact your credit.
Most car leases include a lease buyout clause. Lease buyouts clauses come in two flavors:
Early buyout. An early lease buyout gives you the option of buying the vehicle at any point during the lease term. The leasing company determines the purchase price based on your remaining payments and the car's value at the time of the buyout. You may have to pay an early termination fee as well.
Standard lease buyout. In a traditional lease buyout, you purchase the car at the end of the lease term. Your current lease contract may specify that you can purchase the vehicle for its "residual value," which is the expected value of the vehicle at the end of the lease term. Or your contract might allow you to buy the car for its fair market value (FMV) when the lease ends. You may also have to pay a purchase option fee.
So, is it better to lease or buy a car? Typically, it's easier (and less expensive) to wait until the end of the lease to exercise your buyout option. Either way, the lease payments you've made so far don't count toward the purchase price, so you'll have to come up with the cash to pay for the car or get a car lease buyout loan.
There are several reasons you may want to consider buying out a car lease.
Say you had a three-year vehicle lease period and drove 2,000 over the allowable mileage each year. At 20 cents per mile, those 6,000 extra miles would cost you $1,200 in excessive mileage fees. Rather than pay the fee, you could put that $1,200 toward the cost of buying the car.
You're way under the allowed mileage. If your mileage is way under the allowable mileage, the car might be worth more than the residual value specified in the contract and buying it could be a bargain.
You like the car. If you like the car and have taken good care of it, you may want to buy it. Just keep in mind that you may not be covered by the bumper-to-bumper warranty common to three-year, 36,000-mile leases after you buy the car. If the car starts having mechanical issues, you’ll have to pay out of pocket for any repairs that aren’t covered by the manufacturer's powertrain warranty.
A few months before your lease ends, the auto leasing company will contact you to explain the end-of-lease process and schedule an inspection before you turn in the car.
Before letting the leasing company know you're thinking of buying out the lease, do some research to figure out whether it makes financial sense.
Compare the car's value to the purchase price. Check the car's value at Kelley Blue Book or Edmunds and compare it to the buyout price (plus purchase option fee) in your lease agreement. If the buyout price is less than the car’s value, it might make sense to buy it.
Shop around for financing. Your leasing company may be happy to finance the purchase for you but explore other financing options first. Many banks, credit unions and other lenders offer car lease buyout loans, so shop around to ensure you're getting the best deal. The auto leasing company will have to beat out the competition to get your business.
Notify the leasing company. Toward the end of your lease term, let the leasing company know you’re interested in buying the vehicle and they will advise you of the next steps.
Unless you have the cash available to pay outright for the car, you'll need a lease buyout loan.
Getting a lease buyout loan is a lot like financing any other used car purchase. You'll need to provide the lender with your Social Security number, employment and income information, and the car's vehicle identification number (VIN), odometer reading. They may also need a copy of your lease agreement.
If you want to finance sales tax, title transfer, and registration fees into your loan, you’ll need to contact your state's department of motor vehicles to get an estimate of these charges.
Keep in mind that interest rates are usually higher for lease buyout loans than those available for financing the purchase of a new car.
Does leasing a car build credit? Buying out your car lease should not significantly impact your credit score because both car leases and car loans show up on your credit report as installment loans. However, you may see a small, temporary decrease in your credit score for two reasons:
Hard inquiry. When you apply for a lease buyout loan, potential lenders perform a hard inquiry on your credit report, which can lower your score by a few points.
New credit. Taking out a new loan lowers your average age of credit, which can negatively impact your credit score — especially if you don't have a long credit history.
However, as you make an on-time monthly payment toward your new loan, your credit score should bounce back quickly.
In most types of loans, including a car lease buyout loan, the lender will check your credit report and credit score as part of the loan application process. Like any loan, the better your credit score, the lower your interest rate will be.
Having bad credit makes getting approved for either a car lease or a lease buyout loan more difficult. Some leasing companies and lenders only work with borrowers with fair-to-good credit, but some specialize in working with people with past credit problems. Just keep in mind that whether you lease or buy, having bad credit will likely result in higher monthly payments.
In either case, it's important to shop around, compare offers, and consider the total cost of leasing versus financing before making a decision.
Buying your leased car could positively impact your credit score, provided you handle your loan responsibly. But the effects won't be noticeable right away. Making on-time loan payments each month improves your payment history, which is one of the main factors in calculating credit scores.
If the buyout price is specified in your lease agreement, the leasing company may not be willing to do lease negotiation. However, if the agreement states that you can purchase the car for its fair market value, you may be able to negotiate the FMV by researching the car's value online or comparing the value the leasing company came up with to similar cars for sale in your area.
In either case, it doesn't hurt to ask. Even if you can't get your leasing company to come down on the purchase price, you may get them to make other concessions, such as waiving the purchase option fee.
To avoid seeming too eager, wait until you’re close to the end of the auto lease term to bring up buying out the lease. The leasing company may be more willing to negotiate close to the lease’s expiration date.
Janet Berry-Johnson is a Certified Public Accountant and personal finance writer. Her work has appeared in numerous publications, including CreditKarma and Forbes. See Janet on Linkedin and Twitter.
Lauren Bringle is an Accredited Financial Counselor® with Self Financial – a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin and Twitter.
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