What to do when your car lease ends
Should the current economic environment impact your decision of whether to buy out your lease? Read on to learn more.
Video Transcript: What to do when your vehicle lease ends
- Video duration: 2 minutes, 6 seconds
- Transcript date: Feb. 20, 2023
Your lease is ending: Elapsed time 0 seconds [0:00]
Your auto lease is nearing its end. What are you going to do next? Depending on your lease, you may have a few options: Walk away, trade in or buy out your lease.
Review your lease documents: Elapsed time 10 seconds [0:10]
The vehicle economy has changed with COVID-19, creating a shortage of new and slightly used vehicles. This means that used cars aren't losing value as quickly as they used to. So it's a good idea to take a look at your lease for a "buyout clause" and for more details about your options.
Why would you walk away: Elapsed time 27 seconds [0:27]
Why would you walk away from your lease? The current shortage means that a lot of dealers are happy to buy cars that come back from a lease, even before the lease ends. Sometimes they'll even pay your remaining monthly lease payments to sweeten the deal. Maybe you leased for a specific reason like helping to build or improve your credit. Hopefully, you've accomplished your goal and are ready to move on to the next thing, whether it's another lease or a bigger purchase with better rates.
What about trading it in: Elapsed time 52 seconds [0:52]
What about trading it in? The purchase price of your vehicle was set when you began your lease. Because of the recent changes in auto supply, the dealer's buy-back price may be more than the car is worth. You can use the difference in the trade-in value to help you purchase or lease your next vehicle. Trading in your lease could also be a good option if your transportation needs, or wants, have changed.
What about buying the vehicle: Elapsed time 1 minute, 13 seconds [1:13]
But what if you like your car and want to buy it? Find out the "true value" of your vehicle. This will tell you whether you're getting a good deal with the guaranteed price from your lease agreement. How do I find that out, you ask? Go to a dealership and ask for an offer from a used car manager, not a salesperson. Buying before your lease ends could help you avoid fees. When you lease, you're agreeing to things like a mileage cap. If you go over that cap while you're leasing, you could pay a hefty fine. If you own the vehicle, you can put as many miles on it as you want. Plus, after your three-year test drive, you should know if you like the vehicle and want to keep it.
Keep your budget in mind: Elapsed time 1 minute, 52 seconds [1:52]
It's all about what works for you and your budget. If you want to buy, a USAA Bank auto loan may be the way to go.
Description of visual information: [Consider calling us at 800-531-0342 to get started today. Loans subject to credit and property approval. Minimum and maximum loan amounts apply and are subject to change without notice.
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Most people who've debated whether to buy a used versus a new car have heard this: Cars drop in value the minute you drive them off the lot and drop even more the first year of ownership.
Lately, it's a different story. First came COVID-19's business shutdowns and the resulting shortage of new and slightly used vehicles. The pandemic only exacerbated a global shortage of microchips needed for new cars. The result? A sharp increase in the prices of vehicles across the board.
Chances are, if you leased a vehicle two years ago, your car may be worth more than the expected auction value or residual value stated in your lease contract.
If you're one of the millions of Americans who leases and you're approaching the end of your car lease, you have some choices to make. Is now a good time to buy out my lease?
Read on to help you make that decision.
What happens at the end of a car lease?
New car leases are usually about 36 months. When the lease is up after that three-year period, you may walk away from the lease or buy it out. Check your contract for your options. Some leasing companies may offer an incentive deal to turn in your current vehicle early and start a new lease.
If you go with option two and purchase your vehicle from the lease company, you buy it for the purchase option price from your lease contract. Your contract may include a buyout clause or other fees for early lease termination. Review your contract for the specifics.
This purchase option price, or the vehicle's estimated projected value at the end of the lease, is also called the predicted residual value. The predicted residual value was established at the beginning of the lease and is set in stone.
In years past, it usually didn't make financial sense to buy out your lease. That's because, traditionally, a vehicle's actual value at the end of the term was lower than predicted. But cars are in high demand today, and your vehicle may be worth more than that residual price in your lease agreement. If that's the case, you could stand to gain.
Pros and cons of buying a car at the end of a lease
Most people who choose to lease a car versus buy a car do it because they want to:
- Write off the lease payment as a business expense.
- Take advantage of lower monthly payments for a new car.
- Move to a new car every two or three years.
- Take advantage of mechanical issues and maintenance that are still under warranty or at a low cost.
Because the residual value is usually less than what the car is worth, most lessees return their car after three years and move to the next lease agreement.
Now, however, you may be better off buying the car when you reach the end of your car lease period. In addition to the fact you could purchase your car for less than it's worth, here are more reasons to consider buying your leased car:
- You want to avoid paying fees. When you lease a car versus buying one, you agree to take care of it and follow the factory maintenance schedule. You also agree not to exceed a certain mileage cap for the three years of the lease. If you break those commitments, you may owe big fees. If you buy the car, you can skip all that. See your contract for details.
- You're not in the mood to shop for another car. The past three years have been a thorough test drive. If you like the car you leased and you've enjoyed driving it, you can avoid the hassle of car shopping by buying out your lease.
- You don't like any of the other used or new cars on the lot. Thanks to the current car shortage, you may not have as many vehicles to choose from. Plus, the ones that are available may carry a hefty price tag.
- Your off-lease vehicle may be a good buy even if the warranty period has ended. An off-lease vehicle is one where the lease has ended. In some cases, the manufacturer warranty period will have ended at the same time the lease ends. Even if your leased car is no longer under warranty and is now in need of repairs, at least you know what those repairs are. That could be better than buying a car with unforeseen issues.
How to buy a leased car before the end of a lease
If you're leasing a car, you don't have to wait until the end of the car lease period to buy it. If your contract includes a “buyout clause,” you can buy it at any point during the lease. Since the depreciation rate is calculated ahead of time, the leasing company can't change the buyout price because of market conditions.
Before you decide to buy out your lease, get the facts so you're prepared to make a sound financial decision. Get an estimate for what your vehicle is worth — its "true value" — so you can compare that to your lease contract. You can find your vehicle's true value by taking it to a dealer and asking for an offer. If you want to get an idea for your car's value, research other vehicles in your city that have comparable mileage and equipment.
If you discover that your car's true value is higher than its residual value, you may consider purchasing it, even if you don't need a car. Given that more Americans are working remotely, there is more to consider in your car decision. If you don't need a car, it may be worth buying out your lease, selling your vehicle and pocketing the equity.
Car lease loans versus car buying loans
If you decide to buy your leased car, you'll likely need to finance the lease buyout.
While shopping for the best interest rate generally has little to no impact on your credit score, be mindful that each time you apply for a loan and the lender checks your credit, it creates a hard inquiry on your credit profile.
Depending on the credit scoring model used, generally any hard credit inquiries that took place within a 14- to 45-day period will only count as one inquiry.
It's a good idea to do your loan comparison shopping within a short period to minimize any negative impact on your credit score.
If you use a loan to buy your vehicle, consider the vehicle's age and mileage. If you've driven the car for three years, it may not make the most sense to go for a long-loan term. Your car will continue to depreciate with more time, miles and wear. Consider a shorter term, like 24, 36 or 48 months. Any longer and you'll have been paying for your car for the better part of a decade. Research your options with a USAA auto loan.
Does leasing versus buying affect my credit score?
It's common knowledge that if you buy a car and make regular, on-time payments, you can boost your credit score. But does leasing have the same impact?
If your credit is less than desirable, leasing a car is one way to build your credit while saving money for the car you want to buy. But you can do just as much harm as good if you miss a payment, or even make one late payment.
Whether you buy or lease, look at your budget before you go to the dealership so you know what you can afford. And be sure to factor in the total cost of a vehicle. That not only includes your monthly payment, but also gas, upkeep, taxes, registration fees and auto insurance.
The USAA Advice Center provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank does not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates. All information provided is subject to change without notice.