Looking to get out of a lease? You’re not alone—buying out your car’s lease can be surprisingly unapproachable. Every car lease is different, but what they all have in common is their complexity. That’s why we talked to our team of lease specialists to put together an easy guide on how to do a lease buyout.
Why would you buy out a lease?
New baby? Moving house? Went over your mileage allotment? Or maybe the lease on a car you love is expiring soon? Whatever your reason, anyone leasing a car should consider when and whether buying out your lease makes sense. No matter the case, weighing a buyout will depend on how the current market value of your car compares to your total cost of buyout.
Calculating your cost of buyout
The primary consideration of your buyout is: what’s it gonna cost me? Calculate it with the following equation:
Cost of buyout = Residual value + Outstanding monthly payments + Fees
Residual value: the lion’s share of your buyout
A car’s residual value is an estimate of the car’s worth at the end of its lease term. This number is agreed upon with the dealership when you signed your lease and can usually be found on the lease’s first page. However, only considering this number is insufficient, because the other two factors can often be fairly substantial, so read on, friend.
Outstanding monthly payments: the time-dependent cost
This is what you still owe on the car for the agreed upon lease period. Depending on when you are considering buying out your lease, this number can be small (buying out at end of lease), or large (early buyouts). To calculate this number, multiply the number of remaining months by your monthly payment.
Fees: the unavoidable 🙁 in leasing
Like death and taxes, fees are pretty much unavoidable when it comes to leasing an automobile. On top of that, there is no standard lease and each one is likely to have different fees associated with it. The key consideration here is 1) what types of fees you are on the hook for in case of lease buyout or expiration and 2) how much they’ll cost.
Here are some examples of the types of lease fees you may encounter at expiration:
- Mileage fee for exceeding your agreed upon mileage allotment. Usually charged on a per mile basis.
- Damage fee for dents and harm to the car beyond normal wear and tear.
- Disposition fee for turning your car over at the end of your lease. This covers the lienholder’s cost to recondition and re-detail your car.
Even if you buyout, you can’t avoid fees. Often you will see a purchase option fee if you decide to buy the car. You can usually find the fees you’ll be responsible for in the case of a buyout or at lease expiration outlined near the residual on your original lease, often a bit further down the page.
Cost of buyout vs. market value
The lower the total cost of buyout is relative to a car’s market value, the more sense a lease buyout makes for you. Here are some examples:
Total cost of buyout > market value
- Total cost of buyout = $15,000 and your estimated value = $13,000. Unlikely to be a profitable buyout, but other personal considerations may apply.
Total cost of buyout < market value
- Total cost of buyout = $15,000 and your estimated value = $17,000. Definitely consider buying out your lease, it’s time to make some money!
Total cost of buyout is very close to market value
- The wisdom of a lease buyout will depend on a case-by-case basis here. Maybe you love the car or are happy with it and aren’t ready to part ways with it. In cases where profit is not the primary consideration, it may make sense to buy the lease out.
When should I be thinking about a lease buyout?
You’ll want to start thinking about buying out a lease a few months before your lease actually ends. You may say, “but I still have weeks on my lease!” but it’s best not to wait too long. For one, you’ll need time to do your research. For another, you need to find a buyer if you want to sell your car. Some states have a limit on the time you can wait to resell your vehicle before you have to resell it.
California, for instance, only gives you ten days to transfer ownership to a new buyer before you’re charged sales tax on the lease buyout. If you transfer ownership within 10 days, then they acknowledge that you completed the buyout with the intent to sell and don’t charge you sales tax (which, at California tax rates, is no small sum!). At Shift, we work with sellers to line up a buyer up before the buyout so that you’ll never run into this problem.
Still have more questions on selling and lease buyouts? We’re here to help.