What you should consider when buying a leased car
At the end of a car lease, you basically have two options. You can either return the vehicle to the leasing company or purchase the leased car.
Buying a car through leasing is different than buying a typical new or used car. Not only do you know the history of your leased car (because you’ve driven it), but you also have some financial considerations that only apply when purchasing a car through leasing.
If you’re thinking about buying a lease car, you’ll know exactly how much you can buy the car for and can calculate your final lease charges. Everything about your option to purchase at the end of the lease should be spelled out in your lease agreement. However, careful consideration is required as to whether you should purchase your leased car.
Let’s look at some of the key considerations when purchasing a lease.
The purchase price of the leased car
As with all car purchasing decisions, price is one of the most important factors to consider when purchasing your lease car. Most leasing contracts specify exactly how much the lessee can buy their leasing vehicle for at the end of the leasing term. This price corresponds to the residual value of the vehicle.
residual value
The residual value of a leased vehicle is the value to which the leasing company expects it to fall over the course of the lease term.
Since you have to pay for the loss in value of your leased vehicle during the leasing term, your leasing company calculates this value when determining your monthly leasing payments. However, the residual value of your leased car at the end of the lease term will likely not be equal to its market value. By comparing the residual value (or “purchase option price”) of your leased car to its market value, you can get a feel for whether you’re getting a good deal on a lease purchase.
Residual value vs. market value for a car lease purchase
When purchasing your leased car, the higher the market value, the better. If the market value of your car is significantly higher than the residual value, you will of course be getting a good deal with the purchase. But your end-lease fees can make a lease purchase a good deal, even if the purchase price is less attractive. For example, if the value of your leased vehicle is slightly less than the residual value, the purchase may still be a good deal despite high leasing fees. See image below.
Additionally, when you purchase a car lease, you usually get a car that has only been used by you, so you can be confident in its condition. Only if your leased car’s market value is well below its market value are you likely to get a bad deal (unless you’re buried in the lease’s final fees).
The following graphic shows how the market value of a leased car can differ from the residual value at the end of the lease term.
You have various options for determining the market value of your leased car. Probably the quickest way to estimate the value of your leased car is to visit websites like Edmunds, Kelley Blue Book, NADA Guidesand other.
There are no hard and fast rules for determining the purchase value of the leased car. Every car lease purchase is different and requires its own quantitative and qualitative analysis. If a car’s market value is within a few hundred dollars of its residual value, the purchase is usually a fair deal. Always consider the final fees when considering the option of purchasing a car as a leaser.
Let’s look at some of the most common fees at the end of a lease and how they can impact the attractiveness of a car lease purchase.
Fees at the end of the rental agreement
You’ll most likely have to pay at least one fee to your leasing company whether you return or buy your car (check your lease agreement). Below is a list of possible car leasing terminal fees you may encounter. This list is not complete.
Purchase Option Fee
If you decide to purchase your leased vehicle, your car leasing company will most likely require you to pay for the option to purchase the car.
Remember that the market value of your car may be higher than your purchase price (i.e. the residual value). To protect yourself from excessive financial losses, your leasing company will likely charge a purchase option fee to offset the risk of selling a car for less than its value.
The fee for your purchase option is likely set forth in your rental agreement. It can usually be built into the purchase financing, so you don’t have to pay it upfront.
Important NOTE
Many customers choose to purchase their leased vehicles through the dealer that originally secured the lease for them for an additional fee. Although these additional fees may be reasonable, it is not uncommon for some merchants to charge them unreasonably high additional call option fees (up to thousands of dollars) above the purchase option fee set forth in the lease agreement. In most cases, you have the option to purchase your leased vehicle outside of a dealer and at a reasonable cost, for example through IFS or another financial institution.
Fees for returning a leased vehicle
As with purchasing a leased vehicle, you will almost always have to pay at least a fee when returning your leased vehicle. However, depending on the condition of your car, you may have to pay even more fees.
Disposal fee
If you return your car at the end of the lease term, you will most likely have to pay a disposal fee. This fee is intended to cover any costs your leasing company incurs in selling the vehicle. Like the call option fee, the disposition fee is typically a few hundred dollars.
Excess mileage fee
The most painful thing for many lessees is the additional fee. When estimating the depreciation and residual value of your leased car, your leasing company must assume that you drive your car a certain number of miles per year, as mileage has a large impact on a car’s value. If you drive your car more than your estimated mileage (typically 12,000 or 15,000 miles per year), your car will likely depreciate more than your leasing company expects. To cover any mileage-related depreciation and even make more profit, your leasing company has probably specified in your lease agreement that you must pay a fee for each mile you drive over the lease mileage limit, usually between $0.10 and $0.30 per mile.
So if you drive thousands of miles beyond the mileage limit, you’ll likely face a significant fee when you return your leased car at the end of the lease term. The good news is that you don’t pay any mileage fees when you purchase your leased vehicle. For this reason alone, many lessees decide to purchase their leased car.
Say the residual value of your leased car (i.e., the purchase option price) is $16,000, but on the open market it is only worth $14,000. You probably don’t want to buy your leased car for $2,000 more than it’s worth. However, let’s assume your additional mileage fee is $4,000 (at IFS we’ve seen mileage fees well over $4,000). With such a high fee, it would probably be better to buy the car for $16,000 than return it with a check for $4,000.
Wear and tear fee
If your car is in poor condition or damaged at the end of your lease, your leasing company will likely charge you a wear and tear fee.
As with excess mileage fees, most leasing companies reserve the right to charge wear and tear fees to protect against damage sustained by their vehicles during the lease term, as the condition of a car obviously has a large impact on its market value.
Some lessees choose to purchase their leased car because they want to avoid wear and tear fees. If you buy your leased car at its residual value, your leasing company obviously doesn’t care about its condition.
Early Termination Fee
Most leasing companies want you to complete your lease. If you try to purchase your leased car early, your leasing company will likely charge you an early termination fee.
It’s often not easy to purchase your leased car until the last six months of your lease are up (but this rule isn’t set in stone). Different leasing companies have different rules for early termination of leases. Review your lease agreement or ask your leasing company about early termination requirements.
Your knowledge about your leased car
Buying a leased car, like any other car purchase, is a difficult decision. While the financial factors above are quantifiable – and therefore make your decision to return or purchase easier in some ways – you should also consider other, more qualitative factors in your decision.
There may be many personal reasons why you want to return or purchase your leased vehicle. However, remember that you have as much information as anyone else about the cleanliness and overall condition of your leased vehicle – because you drove it. When some people can’t decide to return or buy for financial reasons alone, they simply make their decision based on whether or not they like their leased car. For those who already like their leased car, the purchase is particularly attractive as it saves them the time, stress and headaches of buying a car.
Financing your lease car purchase
Unless you have the money to purchase your leased car yourself, you will need a lender to pay off your leasing company and give you a car loan. Leasing companies often accept money from reputable lenders to purchase their leased vehicles.
Just because your leasing company will accept almost any repayment doesn’t mean you should go for a car loan. If you’ve been leasing for a while, make sure you know the car loan interest rates and all the terms and conditions of any car loan offer you receive to ensure you’re getting a fair deal.
