Buy A Leased Car: Introduction
One of the primary advantages of leasing a car is the to leverage your dollars. With a lease you can drive more car than you afford to buy because you’ll only pay for as much of the car as you use during the lease term. In other words, you pay only the amount the car is expected to depreciate while you while you have it.
Let’s say you lease a $50,000 car over a period of three years. It is estimated the car will depreciate a total of $10,000 a year if the car is driven a certain number of miles and maintained in a certain condition. Your lease payments are then based on the amount of depreciation the car will incur during the period of the lease.
That said, the total of your lease payments would be $30,000. So for a total of $30,000 you’ll get to drive a $50,000 car for three years. Leases typically give the lessee (that’s you) the option to purchase the vehicle at the end of the lease.
Whether or not this is a good idea depends upon a number of factors.
Buy A Leased Car: Cons
Using our scenario above, if you decide to buy the car at the end of the lease and you don’t have $20,000 in cash lying around, you’ll have to take out a loan. Usually, the leasing company is glad to finance the buyout of the car, as it will give them the opportunity to charge interest on the $20,000 loan.
However, for you, this means it will cost more than $20,000 to get the car. It also means you’ll be making payments on a $20,000 loan. Let’s say you agree to pay the $20,000 off over three years at $400 a month. You could very well find a new car you could lease for $400 a month, rendering your buyout of the leased car a less than ideal solution.
Another situation in which buying out the lease might be a less than optimal decision is if the car works out to be worth considerably less than was anticipated at the inception of the lease. Let’s say you met your mileage cap and kept the car in absolutely pristine condition. Still though, through no fault of yours, the car turned out to be an unpopular model and depreciated at the rate of $15,000 a year instead of $10,000 a year. The buyout will still be $20,000; that’s what was agreed upon in the lease contract. But the car is only worth $5000 on the open market.
That’s a hit you certainly don’t want to take.
On the other hand…
Buy A Leased Car: Pros
There are several reasons you might want to purchase the car at the end of the lease term. First of all, when it comes to buying a used car, you will never find a pre-owned car with which you are more familiar. If you leased the car from new, you know its exact maintenance history, you know what it has been exposed to in terms of weather and driving conditions, and you know if it has ever been in an accident.
In other words, you know all about the car.
Another reason to buy the car at the end of the lease is if it is turns out to be worth more than it was expected to be (the residual value is higher than anticipated). If the car didn’t depreciate as much as was anticipated, so you can buy it for less than it’s worth on the open market — well, that’s a win-win situation. You drove the car at a discount for three years and you get to buy it at a discount after having done so.
That scenario could work the other way around too.
Part of every lease contract is a “mileage cap”. You agree to only drive 10,000 or 15,000 miles a year. If you go over that amount, you have to compensate the leasing company for the extra value of the car you depleted while you owned it. After all, a three-year old car with only 30,000 miles on it is worth more than a three-year old car with 45,000 miles on it. Let’s say you drove more miles than you’d planned upon (in other words, you exceeded your mileage cap). You’ll have to pay for it. Now, depending upon how many extra miles you put on the car, it might work out to be cheaper for you to buy the car outright, rather than pay the penalty.
Similarly, if the car shows more wear and tear than what is considered normal, you’ll also be expected to compensate the leasing company. Depending upon the compensatory amount, it could work out to your advantage to just buy the car rather than pay the fees.
Buying A Leased Car: How To Do It
If you decide to keep the car, the process is pretty straightforward. When you’re down to the last two or three payments, call your leasing company, let them know you want to keep the car and you’d like to negotiate a purchase price for the buyout.
Yes, negotiate a purchase price.
Just because the $20,000 residual value is in writing, doesn’t mean that’s what you have to pay. You can still try to get a better price. The leasing company will have to deal with selling the car to somebody if you don’t buy it. This generally means a wholesaler is involved and a wholesaler isn’t going to give them $20,000 for the car.
Try to work out a better price.
Make sure you’re talking to somebody who has the authority to make a deal and make sure you’ve taken all of the fees, and etc. into consideration when you make your offer.
If it all works out, you could get the best used car deal of your life.