Lease Buyout Guide: Should You Buy Your Leased Car?

Buy your leased car if the all-in cost to buy it is lower than what the same car costs on the open market, and you would be happy to own it. Return it if the buyout is higher than market value and you have no large mileage or damage charges coming. Everything else in this guide is about getting those two numbers right.

First, confirm you have a purchase option

Not every lease has one. The Consumer Financial Protection Bureau (CFPB) notes that you can buy the car at the end only if your lease includes a purchase option. Federal leasing rules require the lease to state whether you have the option and how the price is set, so look for a section titled "Purchase Option" in your contract.

According to the Federal Reserve Board's leasing guide, the price is stated one of two ways:

• A fixed dollar amount, usually the residual value written into the lease. This is the common arrangement.
• Fair market value at lease end, determined by a used-car guide. Some leases use the greater of the two.

Any purchase option fee disclosed in the lease is added on top.

Step 1: get the real payoff

Call the leasing company (the name on your monthly statement, not the dealership) and ask:

Please send me a written payoff quote to purchase my leased vehicle as the lessee. What is it good through, does it include any purchase option fee, and does it include tax?

Ask one more question while you are on the phone: "Is the payoff different if a dealer buys it?" More on that below.

Step 2: add tax and fees

The Federal Reserve's guide notes that almost all states charge sales tax on the purchase price, and you will pay title and registration fees as well. How this works differs by state:

• Some states tax the buyout price even if you already paid tax during the lease; others give credit for tax already paid or handle it differently.
• Some require the tax to be collected by a dealer or the leasing company; others have you pay at the motor vehicle office.

Check your state's revenue department or motor vehicle agency for "lease buyout" guidance before you compare numbers. See sales tax, title, and registration.

If you buy through a dealership, it may add a doc fee and may offer products such as service contracts. Ask for an itemized total. You are generally free to decline optional products; see dealer fees explained.

Step 3: find the market value from live listings

A price guide gives you an estimate. Actual listings tell you what replacing the car would cost.

1. Search The Motor Standard for the same year, model, and trim, with similar mileage, within a distance you would drive.
2. Note the advertised prices of several comparable cars. Each listing shows when we first saw it and every price change since, which tells you whether dealers are holding their prices or cutting them.
3. Remember that advertised prices usually exclude tax, title, registration, and dealer fees. Compare price to price, then add tax and fees to both sides.
4. For a second view, get an instant cash offer for your car from one or two used-car buyers. That is closer to a wholesale number.

Dealer listings are retail asking prices, so they sit above what a dealer would pay you. Your buyout is a good deal when it is clearly below retail. It is a great deal when it is below the wholesale offers too.

Step 4: compare

Example only.

In this example the buyout is about $3,300 cheaper, for a car whose history you already know. If the comparable cars were advertised at $21,000 instead, returning the car would make more sense.

The other side of the ledger: return costs

If you return the car you may owe:

• A disposition fee, if your lease has one
• Excess mileage charges
• Excess wear charges

The Federal Reserve's guide notes that buying the car generally means you avoid excess wear and mileage charges. So if you are 10,000 miles over, add the mileage charge you would owe to the "return it" column. Keep in mind that the extra miles also make the car worth less, so compare against high-mileage listings.

Decision table

Before buying, also check for open recalls and how much factory warranty remains.

Paying for it

You can pay cash or take a loan. The Federal Reserve's guide notes that rates on used-car loans are often higher than on new-car loans, and that shopping around can save money. Get a quote from a credit union or bank and ask specifically for a "lease buyout loan," since the lender needs to pay the leasing company and handle the title. See car loan pre-approval.

Early buyouts

You can often buy the car before the lease ends. The payoff then is generally the residual plus the remaining payments, less any unearned rent charge, plus fees. The exact method is defined in your lease, so ask the leasing company for an early payoff quote rather than estimating.

Early buyout can make sense when:

• You are far over your mileage and plan to keep the car anyway
• The car has damage that would be charged at return
• The market value is well above the payoff and you want to lock that in
• You need to get out of the lease, and buying then selling loses less than the early termination charge

It makes less sense when you would finance the buyout at a much higher rate than the lease's money factor; see how lease payments are calculated.

Selling to or trading with a third party

If the car is worth more than the payoff, you might want to capture that equity by selling it to a dealer or trading it in. Whether you can depends on the leasing company. Policies differ and change:

• Some allow any dealer to pay off the lease.
• Some allow only their own brand's franchised dealers.
• Some quote a higher payoff to dealers than to the lessee.
• Some do not allow third-party sales at all.

Ask the leasing company directly. If third-party sales are restricted, the workaround is to buy the car yourself and then sell it. That can mean paying sales tax on the buyout, and waiting for the title, so check your state's rules and do the math before committing. Our guide to selling or trading in covers the selling side.

End-of-lease checklist

• Find the purchase option section and the residual in your lease, about three months before it ends
• Get a written payoff quote from the leasing company
• Look up your state's tax treatment of lease buyouts
• Pull comparable live listings and one or two cash offers
• Total up both paths: buy, and return with any fees and charges
• If buying, line up financing and confirm how the title will be transferred
• If returning, schedule the pre-return inspection the leasing company offers and keep the report