Is it smart to buy the car at lease-end? Do the math first

In brief

• The buyout price usually includes the residual value, taxes, fees, and any lease payments still owed.
• It tends to make sense when the car’s market value is higher than the buyout amount.
• Ending the lease early can trigger termination fees, so the contract should come first.
• It is worth comparing loans from banks and credit unions instead of automatically using the leasing company’s financing.

Whether a lease buyout is a good deal comes down to one basic comparison: what the leasing company is asking versus what the car would sell for on the open market. In its guide to lease buyouts, Car and Driver says that calculating the buyout price and related costs is only part of the decision.

What a buyout means, and when it can happen

A lease buyout is the purchase of the vehicle you have been leasing, either at the end of the term or before it ends. To complete it, you pay the buyout cost. The first step is to review your lease agreement and make sure the option is actually available.

A purchase at the end of the lease is usually the simpler route. Buying the car early, before the contract expires, is less common and can become costly if the leasing company adds early termination fees on top of the buyout price. Car and Driver notes that this can still be the right choice for drivers worried about excess wear and tear or mileage charges under the lease.

Timing also matters. If you want to buy the car well before the lease ends, check whether the contract includes early-termination charges. If it does, waiting until the lease is over may be cheaper. Leasing companies typically reach out within 90 days of expiration, and Car and Driver suggests waiting for that contact, since the lessor may be more open to negotiation than if you raise the issue first.

How the buyout price is built

The buyout cost is not a random figure. It is made up of several components:

• Residual value: the vehicle’s estimated value at the end of the lease, based on depreciation over the term. The leasing company sets it, it appears in the lease, and you can usually see it before signing.
• Taxes: depending on where you live, state and/or local sales taxes on used cars may apply.
• Registration costs: fees for licensing or registering the vehicle in your name.
• Purchase option fee: some leasing companies charge an added fee.
• Remaining lease payments: these may be included, especially in an early buyout.

The residual value is usually the largest part, and lessors generally do not budge on it. Many contracts also include a clause saying the buyout price is not negotiable, although Car and Driver says it never hurts to ask. Some leasing companies may offer financing discounts, purchase incentives, or waive the purchase option fee.

Comparing the price with the car’s value

Market value is what a dealership or another buyer would pay for the car. Car and Driver points to its own vehicle value calculator, which estimates value using factors such as location, make and model, age, condition, features, and mileage. You can also compare the retail value, meaning what a dealer might charge, and the wholesale value, meaning what a dealer might pay at auction, against the residual value.

$10,000 buyout price in Car and Driver’s example

$7,500 what that car is worth on the market

In that example, returning the car and starting a new lease may be the better financial choice, since paying more than the car is worth rarely makes sense. If the market value is higher than the buyout price, buying it may be a better deal. Car and Driver adds that emotional attachment can justify buying even when the buyout cost is above the car’s value, as long as you accept that trade-off.

How to pay for it

A lease buyout loan works like an auto loan, with fixed monthly payments, an annual interest rate, and a set term. If you have enough savings, you can also pay cash.

Your leasing company may offer financing, but you do not have to take it. Banks and credit unions can be checked for better terms, and some may offer competitive rates, although you will not know until you shop around. Your credit score also matters: the stronger it is, the more likely you are to qualify for a lower interest rate.