It’s relatively well known that buying a car is not the greatest investment, but it is still an investment nonetheless. The good news is there are some best practices to follow when making your decision on whether to buy your leased car. I’ve bought out a leased car, but I’m no hero. I learned a few key things at the end of my lease that I hope anyone looking to buy out their car finds helpful. I know I would have used these tips if I had found them before deciding whether to buy my leased ride.
Here’s what you should know about buying your car when your lease is over … in 5 minutes.
The most important thing to consider…
When buying your car at the end of your lease, it’s helpful to understand what the dealer WANTS you to do. The majority of the time, the car dealer wants you to lease a new car from them. Plainly, the car dealer likely wants your car back so they can turn around and sell it for more than the residual value (all of this of course assumes you are a credit-worthy buyer and the car is in good condition).
Car dealers can make the best return by selling used cars. Used cars offer the best margin for a dealership as the dealer knows almost to a dollar what a car is worth. The consumer walking in from the street almost certainly does not.
When you go back to buy your lease, it’s highly likely the dealership is going to make it “convenient” for you to get into a new car. This is usually through a great deal on a new lease or something of that nature.
One thing that they won’t tell you before you go into buy out your lease…
One of the ways your dealer might make it “inconvenient” for you to buy out your lease is by charging you an “inspection fee.” An inspection fee can be as much as $1,000, in addition to the DMV fee, paperwork, and sales tax involved in buying out your leased car (not to mention the payoff amount of the car itself).
Why are you being charged for someone to inspect your car that you’ve been driving and legally have the right to buy? (assuming you’re creditworthy, they have to legally sell you the car).
Can’t you just mail a check into the bank that financed the car in the first place? The short answer based on my research and experience is no, you can’t. If you called up the financial services corporation functioning as a bank that controls your lease, it’s likely they are not a retail bank and thusly can’t offer consumer-facing services. A car dealership is usually the bank that is franchised to handle the direct transaction of selling you the car. Thusly, car dealerships have the leverage to charge you the lease fees mentioned above.
The good news is that you CAN buy out your car lease from any dealership linked to your manufacturer (e.g, a Toyota dealer if you lease a Toyota. A Honda dealer if you lease a Honda, etc.) Given this, many dealers will negotiate their version of an inspection fee down in order to get you into their “family.” Car companies make almost 50% of their money off servicing automobiles. They also make a pretty penny selling you additional warranties.
Do you need to buy an additional warranty
As a general rule of thumb, here’s how much it will cost to buy out your car at the end of a lease:[The final buyout price] x [11%] = the total to drive off the lot owning your leased car.
The 11% are the taxes and fees to go through with the transaction. If you really want to get taken to the cleaners, you can budget an extra 20%-30% more to get an extended warranty for your car.
Purchasing an extended warranty is obviously your call, but you should know they almost always are a poor deal by-and-large and is something they’re going to throw at you as part of the deluge of paperwork that actually needs to be signed. Despite what the finance person might tell you or lead you to believe (are you sure? Okay, then?) you shouldn’t feel pressured to pull the trigger at the moment. At the very least, do some research beforehand (here’s Toyota’s for example). Warranties can range from a few extra hundred dollars to three thousand dollars. Decide if a couple of hundred extra bucks a month is worth it for a full, bumper-to-bumper warranty over 5 to 6 years before someone makes you pull the trigger on the spot.
So, should you buy your car at the end of a lease?
It’s important to know your car’s bluebook value as this will likely be one of the main factors when deciding whether to buy your car at the end of a lease.
For instance, if you didn’t put a lot of miles on your car during the lease and it’s worth more than the residual value, say $11,000 vs. $8,750, it’d be a bit silly to get rid of a car worth $2,250 more than what you’ve paid for it.
Reasons to buy your leased car
The primary reason to buy your car at the end of a lease is to accrue equity and an eventual return on your investment.
For example, let’s look at a car valued at $17,500. For the first 36 months, you will pay $9,900 on a $275 lease payment. Let’s say that you decide to turn that car in and lease another car for the same monthly price of $275.
Add the two values and you will have paid $19,800 to lease a car for 6 years.
But suppose you bought that same car after the lease expires. You’ll have paid the first $9,900 for the first 36 months, but the loan you’ll take out on the next 36 months will be a bit different. In addition to paying off the residual value of the car $8,750, you’ll also need to pay for sales tax ($656), interest ($525), and a ballpark $2,000 in service and maintenance costs not associated with a lease.
That comes out to $11,931, or a car payment of $331 / month.
So yes, you’ll need to pay an additional $60 / month for the next three years, but the kicker is that you will have equity i.e. own something that is worth roughly $4,300, assuming the car depreciates by 50% after those three years (and you take care of it).
Estimated equity value after 6 years for lease = $0.
Leases are a great option for many, as technology is rapidly changing and might leave people less inclined to own a single car for the next six years. That said, don’t overlook the value of owning your car and potentially paying a premium through a fee in order to do so. Netflix, cell phones, and fitness devices to name a few trends have made access seem more important than ownership.
All of this said, be prepared as you possibly can be when you go to the dealership. The point of this article isn’t to identify car dealers as horrible people. The point is to show where dealers can be really good at finding ways to maximize profits. Warranties, fees, interest rates, service costs. Being aware of what fees to expect before you go to buy off your car will maximize your experience and help you budget accordingly.