Understanding Lease Agreements
Lease agreements are different from traditional car-buying in that you’re essentially “renting” the car for a designated period of time. Instead of eventually owning the car outright, you have the option to turn the car back into the dealer or buy it.
Typically, when leasing a vehicle, your monthly payment is determined by the type of car, the number of miles you plan to drive each year, and the length of your lease. Your buyout price (the price set if you wish to buy the car at the end of the lease) will also typically be pre-determined when you sign the lease. This pre-determined buyout price is causing a headache for the dealers and an excellent opportunity for lessees.
A Unique Opportunity
As the economy continues to recover from the COVID-19 pandemic, many industries are still struggling. Microchip shortages have driven the price of preowned vehicles up significantly. As a result, those with leases expiring soon are finding their leased car is worth much more than the pre-determined buyout price.
For example, the buyout price on your lease might be $20,000. However, the current market value of the car is $27,000.
There are two players here and only one winner.
- You can turn in the vehicle, and the dealer will gleefully turn around and sell the car at the higher market value – netting themselves a nice profit.
- You can purchase the car at the lower buyout price – providing yourself with several opportunities.
If you choose to buy the car, you now have options that could work in your favor, including:
- Keep the vehicle and drive it for several more years. Then use it as a trade-in or sell it.
- Turn around and trade in the car at the higher value for a new vehicle – netting you a larger down payment.
- Sell the vehicle yourself and profit from the difference.
Reasons to Consider a Buyout
While you may not have initially thought about buying out your leased vehicle, it may be the wisest financial move in today’s market. Here are a few reasons why you might buyout your leased car:
- You Like the Car
Aside from the unique market conditions, you may find you really enjoy the car. If you kept it clean and well-maintained, it could be a good investment that will last you several more years. Coupled with today’s low rates, it might be quite the bargain.
- The Lease Costs
A car lease usually comes with specific terms and conditions the lessee must follow. For example, they must ensure the vehicle is in good condition and does not exceed a certain number of miles per year.
If you haven’t taken great care of the vehicle, drove past the agreed mileage limit, or broke any other terms or conditions of the lease, you may face heavy fees. Buying out the lease could help avoid these costly fees.
On the other hand, if you drove significantly fewer miles than your agreed-upon limit and took exceptional care of the car, turning in a pristine vehicle is money in the dealer’s pocket.
- Sell or Trade-In
If the vehicle’s value is significantly higher than the buyout price, purchasing the car might make more sense. Using our example above, assume the buyout price is $20,000 and the current market value is $27,000.
- You could buy the car, then turn around and use it as a trade-in on a new vehicle. Even with paying the taxes from the buyout, you would still net several thousand dollars to use as a down payment on a new car.
- You could purchase the car and then sell it to a private buyer. Again, even after paying taxes on the buyout, you would still likely net several thousand dollars. Then, you can either buy a new car or lease another vehicle.
The Bottom Line
While buying out your lease might not be something you considered before, it’s worth exploring in today’s market. If your lease expires soon, review your paperwork, and find the buyout price.
If your car is worth significantly more than the buyout price, take some time to explore all your options thoroughly.