If you are approaching your lease's end, you might ask yourself, "Should you buy a car after lease?"
You know the buyout price on your lease agreement but are still determining if the numbers are good or if you want to pay that amount.
In a recent article by Ashley Donohoe from Car and Driver, I agree with her when she wrote that the buyout price is lower than the market value. Some of the same principles ring true as rules to follow regarding buying out after your lease is up.
This is a no-brainer, and many lease owners found themselves with built-up equity after the pandemic with inflated vehicle values.
While the main focus of BuyCarBlog is not financial advice, we try to help readers be smarter with their money. This is especially true if you read our other article about Reasons for Leasing.
Your lease is coming up, and you are wondering if you should buy out your car at the end of your car lease from your lease deal.
Leasing a car is like renting an apartment. You pay for the use of it for a certain period, but when that period ends, you've got nothing to show for it. However, if you buy your leased car, you're investing in a vehicle that you're already familiar with.
No surprises, no unknowns, just a car you've grown to love.
- Buy Out Price: Compare the buyout price to used car market values (KBB, NADA) to see if there is equity in buying out the lease. If the market value exceeds the buyout price, purchasing the car may be financially worthwhile.
- Future Repairs: Consider maintenance costs and reliability of the model. Research what repairs may be coming up and factor that into your decision. Leased cars have been maintained, but costs shift to you after buying out. Remember, you have a good idea of ownership, and most likely it will continue with your ownership.
- Changing Lifestyle: Evaluate if the car still fits your needs and lifestyle. Do you enjoy driving it, and does it have the space/utility you need now and in the near future? Don't just default to buying it if you're no longer happy with the vehicle.
I've compiled a checklist of things you should consider before buying out your car lease. The lease buyout is similar to purchasing a car, but the good thing is that you know the vehicle's history and the bottom line price.
If you have excessively exceeded your annual mileage limit, purchasing the vehicle after the lease might be a good move.
I suggest buying the vehicle if you pay $2,000 - $3,000 over due to miles and the residual value is less than the Kelley Blue Book market price.
It all comes down to if the numbers make sense.
Lease vs Buyout Numbers
You can also check out a useful lease vs buyout calculator to compare the numbers. Remember, it all comes down to the numbers and finances make sense.
Here is a link to the https://www.bankrate.com/loans/auto-loans/lease-vs-buy-calculator/ from Bankrate. You can easily punch your current numbers to compare.
My Personal Lease Buyout Story
I previously purchased my Nissan Maxima at the end of the lease because of the excess miles on the odometer. We enjoyed the car, and financially, the extra miles added up to around $2,000, so I opted to decide to buy out the vehicle.
The lease buyout made sense and was a good idea for us.
We were presented with several financing options with reasonable current market rates. This lease buyout loan helped us keep this car in our family. We knew the vehicle history and the excess mileage were all from family road trips we enjoyed over the 3-year lease.
Secondly, the car was part of my life, and I didn't see any changes needed in the future, like a growing family or location.
Before jumping in, let us cover a few key questions about buying your car after your lease ends.
You should ask yourself:
How much is the buyout price compared to market value (Kelley Blue Book Value)?
You might have a great buyout price with the used car market still high. You can buy out your car lease and sell it privately for a small profit.
The leasing company crunched their numbers at the beginning of your lease and determined the buyout price. However, the leasing company might have undervalued the car if you put in fewer miles or if the market experiences inflation. This might provide you an advantage in favoring purchasing the car instead of signing a new lease.
The car market prices have allowed leaseholders to buy and sell their vehicle to a third party like CarMax for a handsome profit. It made perfect sense to purchase and then sell as a financial decision.
You have to crunch the numbers. Remember, you need to look at the numbers overall to see if it makes financial sense.
What has been the car's maintenance, and how will you manage repairs in the future?
The good thing about a vehicle lease is that all the services and maintenance are included in the price of your lease. No out-of-pocket expenses, and you gas up and drive. However, once the car lease is over, you must consider obtaining an extended warranty (if available) or tackling the repairs out of pocket.
Certain brands require little or no maintenance, such as Honda or Toyota. The Korean brands Kia and Hyundai also have great track records of quality parts.
I own a small fleet of European cars like BMW, Audi, and Mercedes Benz, but I can typically wrench on the weekend to handle small repairs. So remember, if you can wrench or have a shop that charges a fair price, you could still enjoy your car for years.
When any car reaches 50,000 miles, there might be a milestone service interval that requires the replacement of parts.
TIP: Google "Car model problems" or "car model repairs" to see what other owners experience as time goes on. You will be surprised by what you might find. As long as you are aware, you can plan to save a small fund for future maintenance.
What is the condition of the car when your return?
Another reason you should consider a lease buyout is if you have excessive wear and tear, aka damages to the car might also add up quickly. If the fenders or bumpers are damaged, you can be held responsible for the repairs. See what the dealership says regarding the condition.
TIP: You will want to return the vehicle in clean condition. Take your car back to the dealership after you had a chance to clean and wash it. The better presented the car, the less likely you will be charged for poor condition.
Do you like the car?
Sometimes when you first lease a car, you are in love and excited. However, there might be things about the vehicle that annoy you.
For example, trunk space or ride quality might be a deal breaker on your lifestyle. In addition, some cars had run-flat tires. Do you enjoy the quality of the ride?
We spent countless hours in the car and should enjoy each minute. If you don't enjoy driving, then it will be a chore. Now is the time to decide if you see that car being part of your life in the months and years ahead.
Does it have the utility your need? Future proof
I remember that a BMW I had did not have fold-down seats. I was very surprised that a luxury brand had 60/40 seats as an option. In my excitement, I did not see the details and had to suffer for a few years until I could opt into a model with fold-down seats.
Secondly, if you have a plan for a growing family, do you have the space for the car seat(s), stroller, and groceries? Consider this a 4-door sedan; while useful, it is more flexible than an SUV or crossover.
Determining the True Value of Your Car:
Since you might have the buyout price on your original lease contract, you may wonder if the number is good, bad, or ugly.
No worries here; KBB.com or NADA.com are good places to cross-reference the value of your leased car. If you drove less than your lease terms, you could leave a lot of value on the table when you turn the car in.
When you visit KBB.com, plug in the year, make, and model of your vehicle plus your current mileage.
KBB will then calculate the retail value and the private party value. The retail value is what a buyer can expect to pay from a dealer. The private party is the value if sold by an owner. Private party prices are typically $2,000 less than retail prices due to the prep fees associated with dealerships.
If the number of KBB for a private party exceeds your residual, consider keeping the car and buying it out.
This is because you SHOULD be able to sell the vehicle in the future for a reasonable price. However, if the private party price is lower than the residual, consider if you want to get into a new lease worry-free for 3-4 years.
Right now, there might be a surge in demand for used cars. As prices of gas and living increase, so will the prices of vehicles.
Can you finance to purchase after lease vehicle?
You must decide if you have the cash to buy out the car outright or finance it at the purchase price.
You can finance the purchase of the car after a lease.
However, you are giving up the advantage of paying now. Remember there are additional costs like Interest rates for the loan since it will be added to the price you pay to the finance company.
You can use an auto loan calculator to help determine your new monthly payment based on your credit history.
Look at other options from your local bank and bank credit union because they offer competitive interest rates.
Since you are getting an auto loan, your credit score will also be used to determine your interest rate on the loan. The higher your credit score, the lower the interest rates. You will also be responsible for the sales tax since purchasing the vehicle.
Credit Score Tools
Here are two free resources that I have personally used to check my credit score:
Depending on the length of the loan, it will impact your monthly payment. Your monthly payment will also depend on the downpayment and loan rate that you qualify for.
Can you negotiate the price before you buy a car?
Sometimes you can negotiate the price. It depends on the lessor if they are open to negotiations. However, based on conversations in the industry, most lessors will have a take-it-or-leave-it attitude since there is a demand for used cars. Wholesale prices of vehicles are at an all-time high, so demand is there. The best bet is to consider the questions listed above and ask yourself if you want to continue driving your leased car for years to come.
Final Thoughts to Buy Car After a Lease is Over
Did you exceed lease allowance?
Check your odometer
If miles are low, plan to keep.
Will you have excess penalties?
Check car for bumps and stains in interior
If car is in fair condition, plan to keep.
Is the Blue Book Value higher than Buyout price?
Input your car, miles into KBB.com and look at private party prices
If blue book is higher than buyout, plan to keep
Was the car in the shop many times?
Google "Your Car Model problems" for answers
If car has $$$ problems at 40k-60k, plan to NOT BUY.
Did you exceed the lease allowance?
High Miles - If your car has excess miles, considerable wear and tear, and penalties exceed $2,000, then consider buying the vehicle. However, if you dislike the car because you don't have enough space, I suggest getting into a bigger car with more utility.
Low Miles - If your car has low miles and was barely driven, you might luck out with buying the car after your lease and selling it private party. You might not make millions of dollars, but you can still drive your car for 6- 12 months without much depreciation. It might make sense to keep the vehicle.
TIP: From my calculations, I would add or subtract a value of $1,000 per 10,000 miles on the car. That's my rule of thumb that I go by on mid-priced vehicles.
Maintenance Costs - If you had many problems handled by the dealer during your lease, then you can be certain that you will run into additional maintenance costs in the future. I am aware of this when I decide to purchase a car and factor it in with my savings strategy for inevitable repairs. Plus, if you are a weekend mechanic like me, I can save hundreds of dollars doing work myself.
Driving Enjoyment - You lived with the car for 2-3 years with your lease. Does it fit your lifestyle? Do you enjoy the ride quality, seats, and overall fuel economy? With increasing gas prices, you need to factor that in when deciding to keep the car. It might be painful to fill up at the pump.
Change is Good - You got into a lease knowing you can change the car in a few years. You may have your eyes set on the latest and greatest. My neighbor enjoys changing cars every few years to try the different brands.
I like to finance or purchase my cars for equity and liquidity if I ever need to sell.
I have leased before, and it is very attractive with the low monthly and low down payment.
If you can write off the lease payments for your taxes, it makes sense to me, or if you do not want the headache of maintaining a car with unknown repairs, a lease will make sense.
Either way, you decide to make. I believe you know in your gut what will make you happy. Enjoy the journey and the drive. It's a good idea to talk it over with your family to get their input.
Be safe and good luck with your decision.