(iSeeCars) – If you’re currently renting a car and nearing the end of your lease, you might be wondering what you should do next. Given the shortage of new car inventory, available new cars are selling above MSRP and car rentals are also much more expensive than they were a year ago. And while buying a used car was once a smart financial decision, used car prices are at record highs and, in many cases, more expensive than new cars.
In light of today’s new and used car market, buying back your car rental might be your smartest option. How does the process work and should you buy back your car lease? We have the important answers.
How a lease buyout works
If you are leasing a vehicle, most finance companies will include a buy-back option as part of your lease agreement. Your car rental contract will indicate the purchase price at the end of the rental based on the residual value of the car, which was estimated when you signed your lease. Leasing companies will often contact you near the end of your lease to let you know your end-of-lease options, which will include either the option to buy out or return the vehicle to the dealership.
Residual value in the current market
Dealers calculate the residual value of a vehicle based on its projected depreciation, and this value is locked in at the start of a car’s lease. And since the start of your lease was before the pandemic and the resulting supply chain issues, that buyout price is likely well below current market value. So while buying your car at the end of the lease used to only be advantageous in certain situations, today’s market has actually made it potentially lucrative to buy your leased vehicle in many cases. According to a recent iSeeCars analysis of the best rental cars to buy, the average three-year-old used car is worth 35.7% or nearly $8,000 more than its estimated residual value at the start of its lease term. This means that you can buy your leased vehicle and either resell it for a profit or continue to drive your used car for well below market value. Keep in mind that if you decide to sell your car, you will have to buy a new one at this high market, which will likely eat up most of your profits.
Understand the value of your vehicle
Here’s how you can compare the vehicle’s residual value or buyback amount with its market price. To calculate the market value of the vehicle, you can use pricing tools such as iSeeCars free VIN check, Kelley Blue Book or Edmunds. Be sure to check your original contract for additional charges like purchase option fees to determine the total amount you will pay for the vehicle.
And be extra vigilant of any “extra” dealer or finance company charges that weren’t specifically mentioned in your lease. Dealerships are well aware of the high value of used cars today, and some try to take advantage of the situation by charging extra fees, either to make more money during the lease buyout process or to discourage consumers from buying the vehicle… so that the dealer can acquire it and resell it themselves at a profit. Check all charges during the redemption process with the original rental agreement and dispute any charges that don’t match.
Can I finance my lease buyout?
You can finance your lease buyout just as you would a classic used car purchase. The dealership will be keen to offer you financing, but you should also consider external financing options as you would for a typical car loan. This means comparing interest rates from other lenders, including banks and credit unions, to see who will give you the best rate on your auto lease buyout loan. Some lenders even offer auto loans specifically for lease buyouts. Keep in mind that the shorter your loan term, the more you’ll save on interest payments, but your monthly payments will be higher. This means that you should opt for the shortest possible loan term. Also, your credit score will determine your loan rate, so make sure it’s in good standing to get a competitive rate. If you have bad credit, you should consider having a co-signer.
Other things to consider
Anyone who has rented a car knows the additional costs that often come at the end of the car lease. These charges include exceeding mileage limits or any excessive wear and tear your vehicle may have, such as scratches or dents. Buying out your lease will allow you to not pay these fees, so if either situation exists with your lease, it’s yet another reason to buy your car at the end of the lease rather than the return.
Some leases offer early lease buyouts that allow you to purchase the vehicle before your term expires. Be sure to refer to your rental agreement to see if you will have to pay any additional fees for early redemption. If there are fees, it’s probably best to wait until your lease is up.
Buying out your vehicle lease can be a lucrative way to save on a lightly used vehicle in today’s market. You’ll also avoid low inventory and markups on new cars. Plus, you can take advantage of the savings that come with buying a used car in today’s market while taking the guesswork out of how the car was driven and maintained by its previous owner. You can even sell your vehicle to a private seller for a profit if you don’t want to continue driving it. So if you’re nearing the end of your lease, you should at least consider buying your vehicle instead of taking out another lease or buying a new or used car to replace it.
If you’re ready to start the car buying process, you can search over 4 million new and used cars with the iSeeCars.com car search engine that helps buyers find the best deals from cars by providing key information and valuable resources, like the free iSeeCars VIN check and top car rankings.
This article, Buying out a car leasing: is it a good idea? originally appeared on iSeeCars.com.