Car leases are still popular finance options in the automotive industry because of their flexibility. They let vehicle owners decide if they want to keep the cars after the lease ends or switch to another model. Further, the borrower can buy out the lease to keep their current vehicle.
A Standard Auto Loan vs. a Lease
While a standard loan and lease are financing options, their formats differ. A traditional loan has a set amount of monthly payments. Its lifetime depends on the payoff value you choose. For instance, you choose a loan that lasts 36 or 60 months. You receive the vehicle’s title after you make the last payment.
On the other hand, leases are short-term loans of 36 months. Payments, which can be lower than traditional loans, are based on the car’s depreciation value during the lease. At the end of the term, you return the vehicle and walk away or lease a new one.
What is a Lease Buyout?
A lease buyout allows you to purchase the car you currently drive. The cost is based on a value predetermined by the leasing agency. Thus, you keep the vehicle once the lease terms end.
How to Determine the Lease Buyout
First, review your existing lease agreement. Standard documents outline the car’s residual value when the loan ends. This is the amount you pay plus additional taxes and registration fees from your local division of motor vehicles (DMV).
The value isn’t always lower than the original price. It’s based on the previous cost for the specific make and model. It also reflects the car’s market demand. If it’s a popular model, then the residual price may be higher than the original Manufacturer Suggested Retail Price (MSRP).
The good news is this value is usually negotiable. An internet search of used car sites provides information on current prices. Take this data to the leasing agent when ready to negotiate a buyout.
Conversion to a Standard Auto Loan
The buyout can be a cash transaction. However, many people can’t afford this option. So, they consider a traditional auto loan.
The new loan’s interest rate might be higher than what you paid on the lease. If you attempt to refinance an auto loan with bad credit, the rate might exceed what you can afford.
According to Lantern by SoFi, “Sometimes refinancing bad credit can actually be a good idea. Speak with your leasing agent first and see what they can do. Your previous good standing could lower the interest rate when you switch to a traditional loan. But you should proceed with caution.”
A shorter-term loan also helps lower your interest rate. Plus, it allows you to pay off the car earlier than expected. As a result, money is freed up for repairs or for a new vehicle.
Consider a lease buyout if you enjoy driving your car. In the end, it’s a good return on investment. On top of this, you don’t have to adjust to a new vehicle every few years.