Why Are Lease Buyout Rates Higher?

If you’re in need of a vehicle, you can choose between leasing and buying a car, and the decision often comes down to personal preference based on multiple factors. You might not have considered leasing a car before, but it actually has numerous benefits, and many people enjoy the excitement of driving a new car every few years.

When you lease a car, you’re essentially renting the vehicle for a certain period of time. Once you’ve finished with the lease terms, you return the vehicle to the dealership. If it fits into your budget and lifestyle, you can lease cars for as long as you want.

Looking for a lender to help with an auto loan after a lease buyout? Compare lenders to see which one works best for you.

To lease a car, you make an upfront payment to cover some of the leasing transaction costs, and then you pay the monthly amount in the lease agreement. After you sign the contract, you’re committed to its terms, including making the payments, staying under the maximum mileage, and treating the car with care to avoid excess wear-and-tear fees.

Leasing a car is ideal for people who don’t drive a lot of miles, love driving new cars with advanced technology, and aren’t looking to own a vehicle outright. But what happens if you aren’t happy with the terms of the lease or the leasing fees after you’ve signed the contract?

What if you want to eventually own a car and stop making lease payments? Are you planning on taking road trips with your family that can eat up mileage?

If any of these factors come into play while you’re driving a leased car, consider a car lease buyout. Speak with your lender to learn what the lease buyout rates are, why they are higher than a traditional loan for a new or pre-owned car, and whether or not you can negotiate the buyout fees.

What Is a Car Lease Buyout?

A car lease buyout is when you purchase your leased vehicle at the end of your leasing period (or beforehand if you want to terminate the lease early) rather than returning it. It is one of a few options you can take when your lease ends:

Return the leased vehicle for another one. If you enjoy leasing a car, you can return the vehicle to the dealership at the end of the lease agreement time frame. You then choose another vehicle to drive, pay the associated fees specified in the contract, and drive away. You’ll make the monthly payments and abide by the rules of the lease agreement.Go to another dealership after the end of the lease. You can simply turn in your leased vehicle, pay any outstanding fees, and walk away. You can go to another dealership if you want to lease a new car or get a loan to purchase a pre-owned or brand-new vehicle.Work with the lender for a car lease buyout. If you decide to keep the car, work with your current lender to get a lease buyout loan. You can also shop around for other lenders to see if you can get a better interest rate or lower monthly payments.

Many people who drive extended miles, want to make changes to the vehicle, or just love the leased car they’ve been driving will choose a lease buyout.

What Is the Process for a Vehicle Lease Buyout Loan?

A lease buyout loan is an end-of-lease option to purchase the vehicle you’ve been leasing. Toward the end of your lease term, your lender will send you information on the lease buyout option process, including the residual value of the car.

The residual value is a calculation the lender makes to determine how much you would have to pay to own the car at its current value.

If you decide to purchase the car, talk with your lending company or dealership about getting a lease buyout package. You’ll want to know the rates for the buyout loan so you’re not surprised by the final dollar amount. Ask for all fees and costs associated with the end-of-lease buyout loan before choosing a lender.

Don’t be afraid to bargain over the interest rates and monthly payment costs with your lender. A lease buyout loan is different from a lease contract. With a lease buyout loan, you can negotiate the terms of the loan, and if your financial situation changes in the future, you can refinance the loan. With a lease contract, once you sign the agreement, you must abide by its rules and policies, which are nonnegotiable.

Why Are Lease Buyout Rates Higher?

There are several reasons why lease buyout rates are higher. The interest rates of lease buyouts are normally higher than on a new car loan, and if you have a poor credit score (under 580), your interest rates will be even higher.

In addition, in recent years, the demand for leased cars has risen among consumers. Due to supply and demand issues, many lenders will raise the fees of lease buyouts to offset the cost of having to sell the leased vehicle as a used vehicle.

Factors to Consider with a Lease Buyout Loan

While it may seem like a breeze to get a lease buyout loan, especially if you have good credit, you’ll want to consider a few factors:

Not All Lenders Offer a Lease with the Option to Buy

Before you sign your lease agreement, carefully review it to see if the lender offers a lease with an option to buy. If you don’t see that option on the lease agreement, either try to negotiate a buyout clause or find another lender. Remember, once you sign the lease agreement, you can’t change the terms, including adding a buyout option.

Be Aware of the Vehicle’s Residual Value

The residual value of the car is what you’ll pay to purchase it at the end of the lease. However, if the market value (the car’s resale price) is lower than the residual value, you run the risk of getting upside down in your loan. If this is the case, you may end up borrowing more than the car is worth in your lease buyout loan.

You May Pay More in Interest

Because lenders view leased cars as used cars, they often charge higher interest rates than they do for new car loans. You may end up with higher monthly payments as a result.

You’ll Be Responsible for Repairs and Maintenance of the Vehicle

When you drive a leased car, you have a bumper-to-bumper warranty covering most major repairs caused by defects in materials or poor-quality construction. Some dealers even provide maintenance with the leased vehicle.

Once you get a lease buyout loan, you’re responsible for repairs and maintenance of the vehicle. You’ll want to factor those costs, plus your loan payments, sales tax, and any documentation and transfer fees, into your budget.

What’s the Best Way to Get a Lease Buyout Loan?

Once you’ve decided that a lease buyout is right for you, follow these steps to get your lease buyout loan:

Get in Touch with Your Leasing Company

As you come to the end of your lease terms, your lender will get in touch with you about your end-of-lease choices. If you have the option to get a lease buyout loan from the lender, discuss it with them and note their rates, the leased car’s residual value, and any closing costs and associated fees.

Shop for Other Lenders to Get Various Quotes

You may find a wide range of rates quoted by lenders for a car lease buyout. Take the time to shop around for quotes to see who can give you the best interest rates with the least amount of fees. Once you begin your search for a lease buyout loan, try to conclude it within 14 days to avoid a hit on your credit score.

Start the Application Process and Close the Loan

Once you’ve found a lender you’re happy with, gathered all the paperwork together, and finalized your budget, fill out the loan application and submit it. When the lender approves the loan, review it carefully to be sure that all the information is correct.

After you sign and submit the loan application and pay the loan acquisition fees and costs, you can start making payments toward the ownership of your car. At the end of the lease buyout loan, you’ll have full ownership of your vehicle.

A car lease buyout loan is a viable option if you enjoy driving the car you’ve leased and want to avoid paying for excess mileage and wear-and-tear fees. In addition, if you want to make changes to the vehicle, such as putting on different wheels or adding a lift to an SUV or truck, a lease buyout is a good choice.

Keep in mind that car lease buyouts often come with higher interest rates and fees associated with getting a new loan, so speak with your lender to see if you can negotiate the terms of the lease.

Finance & Insurance Editor

Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.