What Happens at the End of a Car Lease?

Over the past few years, the cost of vehicles has risen at a rapid pace. In August 2023, average car transaction prices were around 25% higher than they were in August 2020 according to Kelley Blue Book. And thanks to these changes, the old advice about what to do when your car lease ends might not hold true anymore.^[1]

Most car leases range from two to four years. At the end of that period, you have a decision to make — do you hand the vehicle over to the dealership (or leasing company), purchase it yourself, or take some other action?

If you leased your car a few years ago, that vehicle might be worth more than expected thanks to the recent shifts in car prices. In light of these changes it’s wise to consider your options carefully, and to do so before your lease ends.

The following guide will help you understand what happens when a car lease ends. You’ll also learn how to discover what your vehicle is worth at the completion of your lease, your lease buyout number, and how to evaluate other details that will impact your end-of-lease decision.

How long do car leases last?

New car leases come in a variety of term lengths. In general, you can find a range of leases that last between 24 to 48 months. However, 36 months seems to be the most common lease term available. (Note: Leasing a car may help you build credit if you make your lease payments on time throughout your lease term.)^[2]

It’s also worth noting that the amount of money you need to put down when you sign a new lease can vary from one auto manufacturer to another, among different types of vehicles, and even according to your credit score. Cash due at signing, which may include your down payment, your first payment, sales tax, and other fees, often ranges from around $1,500 to over $8,000 depending on your lease selection and various factors. ^{[2] [3]}

Leasing vs. buying

When a lender approves you for a car loan to finance a vehicle, you use that financing to purchase a vehicle from a dealership or some other private party. Once you make your final payment as agreed at the end of your loan term, you own the vehicle outright. That’s not the case, however, when your lease term comes to an end.

A car lease is like a long-term rental agreement. The monthly payments you make on a car lease cover the following:

• Vehicle depreciation (the estimated loss of a vehicle’s value during the lease term)
• Interest
• Fees^[4]

Your lease agreement may also include details regarding an early termination fee—a penalty you may have to pay if you attempt to end your lease before the end of its term. Most leases also contain restrictions that limit the amount of miles you can drive the vehicle each year, and details regarding penalties you may incur if you exceed these limits.

Your options at the end of a car lease

When it comes to end of car lease options, there are five common choices to consider. You should evaluate all of your choices before your car lease comes to an end so you won’t have to scramble to make a last-minute decision.

Buy the car at the end of the lease

A car lease buyout occurs when you decide to buy your car at the end of your lease term. You might want to consider this option if the buyout price for your vehicle is less than the car’s value when your lease comes to an end.

The buyout price for your vehicle will appear in your lease agreement. This cost, also known as the vehicle’s residual value, is based on a projection of what the leasing company believes the vehicle will be worth at the end of your lease term.

However, projections can be wrong. So, it’s important to research the current market value of your leased vehicle to see if it’s worth more than the car’s residual value. This has been the case for many lease customers lately thanks to inflation in the automotive industry.^[5]

If you discover that your car is worth more than the lease company projected it would be when you entered into your lease, buying out the vehicle at the end of the lease term could work to your benefit. Even if you don’t want to keep the vehicle, you could purchase it and resell it to a third party. This approach could help you earn extra cash from the equity in the vehicle which you could apply toward your next car purchase, lease, or something else.

You might also want to consider buying out your lease if you’re in a situation where you need to avoid paying fees to the leasing company. For example, if you exceeded your agreed to mileage cap, failed to follow the factory maintenance schedule, or damaged the vehicle during the lease term, a buyout might be more affordable than paying expensive fees and then having to come up with even more money to get yourself into another vehicle afterwards.

Of course, it is important to keep in mind that buying out a lease can be more expensive compared to simply purchasing a vehicle via a traditional loan. So, if you haven’t entered into a lease yet and you think you’ll want to own a car over the long term, it’s probably best to avoid the lease process altogether.

On the other hand, if you’ve already entered into a lease, you can’t turn back the clock. Instead, you should make the best financial decision available now and focus on the choices you want to make in the future.

Extend the lease

Your leasing company might also give you the option to extend the lease on your current vehicle. Lease extensions are sometimes available for a few months or even up to a year, depending on the situation.

If you’re not ready to buy out your lease or make another move where your vehicle is concerned, consider calling your leasing company to see if a lease extension is available. Most lease extension agreements contain terms that extend the mileage you’re allowed to drive on the vehicle and reduce your future buyout number as well. But you should confirm these details in writing and make sure they seem fair before you agree to an extension.

Trade-in the vehicle for a new lease

If your situation makes you a fan of leasing rather than buying a car, you might want to start a new car lease when your current one comes to an end. Yet even in this situation, you should check if your current vehicle has equity you can use to your advantage when your lease ends. If it does, consider buying out the vehicle and trading it in rather than simply turning in your vehicle to the leasing company at the end of the lease term.

On the downside, this process might involve more work. Depending on the terms of your agreement, you may first need to save up cash for your car buyout or secure a car loan to make the purchase. But if you’re willing and able to jump through these extra hoops, you might save yourself thousands of dollars for the effort. In some cases, the process may be easier if you can transfer the lease. (See below.)

Transfer the lease

Some leasing companies will let you transfer your lease to another person or a dealership. This process is also known as a lease takeover or swap.

You might consider this option if you want to allow another driver to take responsibility for the remainder of your lease payments. Again, you must confirm that your leasing company permits this sort of transfer. Beware if only a limited transfer is available. In this scenario you could be at risk if the new driver fails to make the lease payments as agreed.

People may also consider transferring a lease to negotiate a third-party buyout. With this approach, you first negotiate a purchase price with the buyer (often a dealership). Next, the buyer agrees to pay the buyout price to the leasing company and writes you a check for the difference.

The catch with this strategy is that at present fewer automotive finance companies allow third-party buyouts of leased vehicles than in the past. According to Edmunds, the only finance companies that don’t impose meaningful restrictions on third-party buyouts are as follows:

• Chrysler Capital (Chrysler, Dodge, Ram, Jeep, and Fiat)
• Mitsubishi Motor Credit of America
• Toyota Financial Services

In addition to the three automotive finance companies above, both Audi and Volkswagen allow third-party buyouts if the buyer is a dealership instead of an individual.^[6]

Turn in the car

If you followed the terms of your lease and didn’t experience any problems along the way (see below), then one of the simplest ways to end a car lease is to return the car to the dealership. However, if you established any equity in your vehicle during the term of your lease, you’ll lose that value by taking this approach.

Preparing for the end of your lease agreement

As you approach the end of your car lease, you may start to receive promotional emails or letters from your leasing company. These communications remind you that your lease is ending, and may try to influence you to start a new vehicle lease or consider other options.

You might not know what your final decision will be yet when your lease ends. Nonetheless, you can still take steps to put yourself in a better position when the end of your car lease arrives. Here are three tips that may help you.

• Make sure the vehicle is in the best condition possible. As your lease nears its end, it’s a good idea to clean the vehicle, inspect it, and make any necessary repairs. A vehicle in good condition is worth more if you plan to buy it or sell it to a third party. Likewise, if you decide to return the vehicle, taking these steps might help you avoid otherwise costly penalties.
• Research the value of your vehicle. Before your lease term ends, look up the value of your vehicle. You can use free online tools like Kelley BlueBook, Edmunds, or Autotrader to make this process easier. Just be sure to be honest about the current condition of the vehicle to get the most accurate estimate possible.
• Check the buyout price of your vehicle. The buyout price of your car is outlined in your lease agreement. This price is based on the estimated residual value of your car at the end of your lease term. If your buyout price is less than the value of your vehicle, you may want to strongly consider buying out your lease.

You may also need to get a new car loan or enter into a new lease agreement when your current car lease ends. As a result, it’s important to check your credit and make sure it’s in the best shape possible. Good credit may help you qualify for better interest rates on car loans and better lease terms as well.

Potential problems at the end of a car lease

Before your car lease ends, it’s also important to keep an eye out for potential complications. The following issues could cause you problems at the end of a lease, including extra fees you might owe to your finance company.

What happens if my lease car is damaged?

If you’re involved in an accident, your car insurance provider (or the insurance provider for the at-fault driver) should cover the cost of repairing the damage to your leased vehicle. It’s your responsibility, however, to make sure that the repairs occur. You may also need to inform the leasing company of the damage, check your lease, and see if it requires you to use a specific repair company or body shop to provide the repairs to the leased car.

Outside of accidents, understand that car leases feature strict rules when it comes to vehicle damage. Some normal wear and tear is to be expected. Yet any issues beyond a few small scratches or flaws could turn into costly problems if you decide to turn in a leased vehicle without repairing it first.

Read the terms and conditions of your lease agreement carefully. In general, you should expect to be responsible for repairing the following types of damage.

• Dents and scratches
• Chipped or cracked glass
• Tires with low tread
• Damaged bumpers
• Interior stains, scratches, or tears^[7]

If you don’t plan to turn in your vehicle at the end of a lease, you don’t have to worry about potential fees for damages. However, you may still want to consider making certain repairs if doing so would be worth the investment (assuming you intend to sell your vehicle to a third party after the lease period is over).

What if I exceed my mileage allowance?

When you sign a lease agreement, you agree to limit the number of miles you will drive the vehicle each year. In most cases, standard mileage limits on car leases range between 12,000 to 15,000 per year (though exact terms may be negotiable and can vary).^[8]

In the event you drive more miles than you agreed to in your lease agreement, you’ll have to pay a penalty when (and if) you turn in your vehicle at the end of your lease. This over-mileage fee ofter ranges between 15 cents to 25 cents per mile. If you exceed your lease by thousands of miles and your fee is 25 cents per mile, you could wind up owing thousands of dollars as a result.^[9]

If you opt to buy out the car when your lease ends, no over-mileage fees will apply. But if you plan to turn in the vehicle you’re logging more miles than your lease allows, you may want to consider one of the following solutions.

• Start saving money for the over-mileage penalty.
• Attempt to reduce the amount of miles you drive through car pooling, public transportation, and other means, if possible.
• Considering whether ending your lease early might be worthwhile (and find out whether it’s an option based on your lease agreement and if penalties apply).

Which option is best at the end of a car lease?

There’s no one-size-fits-all solution for what to do when a car lease ends. But if you discover that the value of your car is worth more than the buyout price, it’s typically worth trying to capture some of that equity for yourself.

Most of all, it’s important to start researching your options long before the end of your lease arrives. You don’t want to be forced into a last minute decision without having time to research your options and make the best financial choice for your situation.

Sources

1. Kelley Blue Book. “When Will New Car Prices Drop?” https://www.kbb.com/car-advice/when-will-car-prices-drop/#link1
2. Carfax.com. “Best Lease Deals in August 2023. https://www.carfax.com/blog/best-lease-deals-on-cars
3. Jdpower.com. “What Credit Score Do You Need to Lease a Car?” https://www.jdpower.com/cars/shopping-guides/what-credit-score-do-you-need-to-lease-a-car#:~:text=Leasing%20companies%20offer%20lower%20down,and%20pay%20higher%20monthly%20payments
4. Experian.com. “What Is a Car Lease and How Does It Work?” https://www.experian.com/blogs/ask-experian/how-does-leasing-a-car-work/
5. The Wall Street Journal. “Is Your Vehicle Lease Ending Soon? Here’s What to Do Next.” https://www.wsj.com/articles/is-your-vehicle-lease-ending-soon-heres-what-to-do-next-11649928600
6. Edmunds.com. “Returning your car lease? Sell it instead.” https://www.edmunds.com/sell-car/sell-my-lease/
7. Autotrader.com. “Leasing a Car: What Type of Damage Will You Be Charged For?” https://www.autotrader.com/car-shopping/leasing-a-car-what-type-of-damage-will-you-be-charged-for-216155#:~:text=run%20more%20smoothly.-,Leased%20Car%20Damage%20You%27re%20Responsible%20For,%2Dand%2Dtear
8. NCDOJ.gov. “Buying vs. Leasing.” https://ncdoj.gov/protecting-consumers/automobiles/buying-versus-leasing/
9. Autotrader.com. “I’m Way Over My Car Lease Miles, What Do I Do?” https://www.autotrader.com/car-shopping/im-way-over-my-lease-miles-what-do-i-do-272571#:~:text=Most%20times%2C%20you%20will%20have,can%20add%20up%20pretty%20quickly

About the author

Michelle Lambright Black is a nationally recognized credit expert with two decades of experience. She is the founder of CreditWriter.com, an online credit education resource and community that helps busy moms learn how to build good credit and a strong financial plan that they can leverage to their advantage. Michelle's work has been published thousands of times by FICO, Experian, Forbes, Bankrate, MarketWatch, Parents, U.S. News & World Report, and many other outlets. You can connect with Michelle on Twitter (@MichelleLBlack) and Instagram (@CreditWriter).

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