Understanding Lease Purchase Options
One of the most attractive parts of auto leasing is the flexibility. You can buy your leased car at the end of the term or swap it out for a brand-new vehicle. If you are approaching the end of your lease term, you might be wondering whether using your purchase option is the right choice for you.
It’s imperative that you go to the dealer armed with all the necessary information to ensure that you get the best deal possible. In this article, we are going to walk through a lease purchase option, and discuss who should consider purchasing their lease, and why.
How Does a Lease Purchase Option Work?
A lease purchase option, sometimes called a lease buyout, is an option in your lease agreement that gives you the right to purchase the car after the lease term has expired. The price of the car and all applicable fees, should you choose to buy it, is already outlined in the agreement.
This price is based on the vehicle’s residual value, which is the dealer’s estimate of the car’s value after the conclusion of the lease term. When you lease a car, you are just paying for the amount the car depreciates over the period that you are driving it. Assuming the estimates are accurate, the residual value will merely be the remaining value that you didn’t already pay.
But here’s the kicker; The market is unpredictable and always fluctuating, putting some lessees in a very advantageous position when it comes to buying the car. For others, it might not be such a great deal. Understanding the difference is critical to making the best decision.
Your leaseholder will usually contact you within 30-60 days of your lease expiration to discuss your options for returning the vehicle or using the purchase option. Before committing to anything, carefully review your options.
Purchase Option Fees
In most cases using your option to purchase the vehicle will have a purchase option fee, averaging about $300-$600. While it is important to factor this expense into your analysis, keep in mind that returning the vehicle carries many fees of its own, such as disposition fees and excess mileage fees.
Often, the fees incurred by returning the vehicle far exceed the purchase option fee. Luckily, you have all the information you need at your disposal to make an informed decision. Your lease agreement outlines all applicable fees.
Even if we assume that the car is in perfect shape, and under its mileage limit, the disposition fee, which covers the cost of preparing the vehicle for resale, will often be pretty close to the purchase option fee, making the difference negligible.
Reasons to Buy Your Leased Car
For some lessees, buying their leased car at the end of their lease agreement is the best financial option. Let’s discuss a few reasons you might buy your leased car.
The Price is Lower Than Market Value
As we touched on before, the price of the purchase option is agreed upon in the initial lease agreement and is based on the vehicle’s residual value. Because this amount is an estimate, it doesn’t always turn out to be accurate.
There is no shortage of tools online to help you get an accurate estimate of your car’s current market value. Kelley Blue Book, Edmunds, and Cars.com are just a few well-known examples. By using multiple tools and being honest about the condition of your car, you should be able to get a pretty accurate estimate of what your vehicle is currently worth.
Compare the current market value to the purchase price outlined in your agreement, plus the purchase option fee. If the purchase amount is less than the actual market value, buying the car is a good deal.
You are Way Over Your Mileage Limits
Lease agreements allow drivers a certain number of miles over the lease term and often carry steep penalties for exceeding them.
If you are approaching the end of your lease term and are above your limit by more than a few thousand miles, consider purchasing the vehicle. When you buy the car, the dealer will not charge for excess mileage.
On the other hand, being way under your mileage limits is also a compelling reason to purchase the car. When dealers estimate a car’s residual value, it is under the assumption that you will drive your allotted mileage. If the vehicle is under its limit by thousands of miles, the market value could be significantly higher than the purchase price. If this is the case, returning the car amounts to losing a lot of the value that you already paid for. Learn more about the leasing process and mileage limits here, “Everything You Need to Know about Auto Leasing.”
Your Car is in Bad Shape
When you return a vehicle to your leaseholder, they will charge fees for any damage to the vehicle that is above normal wear and tear. For more information about what constitutes normal wear and tear, see your lease agreement.
If your car has significant damage in the form of dents, scratches, broken electronics, or interior damage, you will want to factor these fees into your decision. In many cases, it may make more financial sense to buyout the lease than pay these penalties. Before making a final decision, also consider the cost of making these repairs yourself. It may save you more money than either paying the fees or buying the vehicle.
You Love Your Car
For some, the leasing lifestyle just isn’t for them. While driving brand new cars every few years may have sounded great at first, sometimes the bond between mankind and machine is just too great to let go. You know your car inside and out, and you love every feature and every flaw.
Your car has seen you through good times and bad, always being by your side for companionship on the road. The very thought of losing it brings a tear to your eye.
If it’s at least a fair deal, there’s nothing wrong with buying the car simply because you love driving it. Can you really put a price on love?