Most people who’ve debated whether to buy a new car have heard this: Cars drop in value the minute you drive them off the lot, and they drop even more the first year of ownership.
But that’s not always the case. Remember in 2020 when the COVID-19 business shutdowns led to a shortage of new and slightly used vehicles? Then the pandemic exacerbated a global shortage of microchips needed for new cars. The result? A sharp increase in the prices of vehicles across the board.
So, if you're one of the millions of Americans who lease and you're approaching the end of your car lease, you have some choices to make depending on the car market. If you think your car is worth more than the residual value stated in your lease agreement you may be asking yourself: 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. While auto lease agreements can vary, you usually have a few general options at the end of the term:
- Return the vehicle and walk away.
- Buy the vehicle from the lease company, through a lease buyout option.
- Take advantage of a lease incentive to lease a new vehicle.
- Extend the terms of your current lease.
- Utilize a trade-in option to purchase or lease a new vehicle.
The important note here is to thoroughly understand your lease agreement and options available, both throughout the lease term and at the end of the lease.
When it comes to buying the vehicle during your lease or at the end of the term, you have some general financial considerations. Is the car's actual value at the end of the term lower or higher than predicted in your lease agreement? Depending on the answer, you could benefit from purchasing the car.
If you decide to buy your vehicle from the lease company, you buy it for the purchase option price on your lease agreement. This purchase option price is the vehicle's estimated projected value at the end of the lease and is also called the predicted residual value.
While the predicted residual value was established at the beginning of the lease and is set in stone, you still need to consider buyout fees, sales tax and other fees in your final decision to buyout the lease or not.
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.
- Have free routine maintenance and warranty peace-of-mind.
Because the residual value is usually less than what the car is worth, most lessees return their car after the lease term and move to the next lease agreement.
However, there are times where 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 buy 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 at the end of your lease, you can skip all that. See your contract for details.
- You're not in the mood to shop for another car. The past few 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. Depending on the market, 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.
- You want to sell the vehicle. If the car's market value is higher than your purchase price, you may want to sell the vehicle privately for a profit.
How to buy a leased car before the end of a lease
If you're leasing a car, you don't always 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, or 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.
Car lease loans versus car buying loans
If you decide to buy your leased car, you may 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. So 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 an entire lease term, 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 Bank 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 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.
Consider a USAA Federal Savings Bank Loan.
We offer auto loans if you decide to buy.