What Is a Lease Buyout Loan?

When your lease ends, you're provided with the following options: extend the lease, return the car, re-lease, or buy it. If you're considering buying but you're lacking the funds, a lease buyout is a handy way to purchase a car you're already comfortable with for a predetermined price. However, these loans typically carry heftier interest rates than standard new car loans, and they aren't offered by all lenders, so your selection might be somewhat restricted.

If you still want to go ahead with the buyout then you should read your lease agreement carefully and notify your leasing company about your purchase plans. Multiple lenders, including banks, credit unions, online lenders, and finance companies, offer lease buyout loans. These are typically based on the amount you need, the annual percentage rate, and the loan term. It's wise to compare rates and terms to find the most suitable loan. 

There are a few things you need consider with a lease buyout loan before making a final decision: 

1. Limited availability among lenders

Regardless of whether you're considering a bank, credit union, or finance company for your loan, keep in mind that loan offerings, rates, and terms differ across lenders. As you explore your options, make sure to verify if the potential lenders provide lease buyout loans, as this is not a universally offered service. It's a good idea to look around and compare rates and terms to make sure you're getting the best deal.

2. Risk of falling into negative equity

Knowing how much your leased car is worth right now is really important. You can use free online tools like Edmunds, Kelley Blue Book, or J.D. Power to get an idea of your car’s current value. If your car is worth more than what you would have to pay to buy it at the end (plus any extra fees), then you might actually make money if you decide to buy it.

On the other hand, if your car is worth less than what you would have to pay to buy it, getting a loan to buy out the lease could mean you end up owing more on the loan than the car's worth. This is especially true if you don't put down any money upfront and finance the whole cost of buying out the lease. The bottom line is you could end up borrowing more than the car is worth.

3. Interest rates tend to be higher

Cars under lease are categorized as used vehicles, and as such, you may need to arrange financing specifically for a used car. Generally, the interest rates on used car loans are higher than those for new car loans. It's also worth noting that lease buyout loans, provided by some lenders, can have interest rates that are higher than both new and used car loans.

If you don’t want to take the risk of falling into negative equity or pay off high interest rates, pick a car subscription from FINN. With FINN, you can swap out your car for a new one every 6-12 months, giving you flexibility that traditional leases just can't match. Plus, insurance, doorstep delivery, and maintenance are included in one monthly fee. 

It's important to know that some lease agreements might not allow buyouts at the start or end of the lease term. Imagine wanting to buy out your lease with only two months left, only to learn your contract doesn't allow it in the last few months.

As for the approval of your loan, it will depend on your income, expenses, credit score, the loan term, the car's value as a used car, and the annual percentage rate (APR). Follow these steps if you want to start the process: 

1. Study your leasing contract

Besides mileage limits and wear and tear guidelines, your lease contract will specify the timing for a permissible buyout. It will clarify if you can buy the vehicle at certain times, like three months before the lease ends or nearer to the lease's conclusion.

2. Estimate market value of your car

Know the current market value of your car and compare it to its residual value*. This knowledge will help you in negotiating your pre-approved loan and purchase price better.

*The residual value of a leased vehicle is the estimated worth of the car at the end of the lease.

3. Explore different lease buyout loans

Start by talking with your bank or credit union to see if they've got lease buyout loans. Remember, not every place will offer these. Take a look around at other banks, credit unions, or even online lenders. Take your time to compare what's out there and find the option that feels right for you.

4. Optional: Try to negotiate buyout price

You can try to negotiate a lower buyout price but its success depends on the lender and their policies. When you start a car lease, the leasing company predicts the car's residual value, which is its worth at the end of the lease. This value determines your buyout cost, which is typically fixed in the lease agreement.

Your ability to negotiate depends on whether your lease is managed by the carmaker's finance division, known as a "captive lender," or an independent bank or credit union.

5. Sign the offer

Once you've secured approval for your lease buyout loan, the next step is to complete the necessary paperwork and to transfer the title. Talk with your lender and check out your state’s motor vehicle services to understand the title transfer process. Generally, the title remains under your lender's name until you've fully repaid your lease buyout loan.

If your car's value is higher than the amount you need to pay to own it, buying it might be a better choice than getting a new lease. There are dozens of online lenders that can get you low interest rates for your buyout loans: 

*Please check the lending partner column for the latest details. The rates may vary based on loan term, credit history, and credit score. 

There are several reasons why you might want to buyout your car lease: 

• You enjoy driving the car
• The predicted value of the car at the end of the lease is a good deal
• You've driven more miles than allowed and need to pay a fine
• The car has more wear and tear than expected, leading to costly repairs

If you already know that your dealership accepts a buyout, then there are certain tips that will let you drive away with the car you want with the best deal possible:

1. Timing matters

The key question isn't if you should buy your leased car, but when. Timing can impact the price. An early buyout—buying before lease expiration—may bring extra fees. Review your lease agreement to understand these costs. If they're high, consider waiting until the lease ends.

2. Value of your car

There are two types of car values and knowing these can help you negotiate a fair price when buying a car, ensuring you get a good deal. Compare your research on car values with the residual value in your lease agreement. This value, along with any purchase-option fee, determines your buyout price.

1. The retail value is the price you'd pay to buy the car from a dealer. 

2. Wholesale value is the price a dealer would pay to buy the car at an auction or from another dealer. This is usually lower than the retail price as it doesn't include any markup for profit.

Independent research helps you estimate a fair price. If there's a significant discrepancy between your figures and the one from the leasing company, it might be better to return the lease and consider buying a different used car.

3. Look for more financing options 

While the leasing company may offer finance for the purchase, explore other options before committing. You could pay more due to dealer markups. Often, financial institutions offer better interest rates than leasing companies or dealerships, and opting out incurs no penalties. Also, consider car lease buyout loans from lenders, which function like refinancing loans.

4. Let the leasing company come to you

Wait with your lease buyout discussion. Initiating the conversation might compromise your negotiation position, say consumer advocates. Usually, leasing companies reach out around 90 days before a lease expires. By contacting them prematurely, you could reveal your intent to purchase. Like any transaction, maintaining your interest level discreetly could give you a slight edge in your car lease buyout.

5. Negotiate 

Many companies have firm lease buyout prices, limiting the scope of negotiations. But, it is still worth discussing. Without asking, you won't know the potential deal you might secure. Consider requesting for purchase-option fee waiver, purchase incentives, and financing discounts.

If car leasing doesn't suit you, there are a few alternatives that you can consider. Buying a used car with cash is a practical choice, especially one that allows you to own a car without interest charges. Alternatively, Buy-Here-Pay-Here dealerships offer in-house financing, although with higher interest rates and down payments. If you live in a big city, car-sharing services are good short-term rentals.

A car subscription from FINN is the optimal alternative for a car leasing deal. FINN caters to those seeking car access without long-term commitment or high-interest rates. With a single monthly payment, you cover everything from insurance and maintenance to roadside assistance. You can choose from a wide range of cars, get a quick approval, and enjoy direct-to-doorstep delivery.