For anyone facing an expiring car lease, it’s decision time: either buy the car from the finance company or return it and find a new set of wheels. Deciding what to do with your current vehicle is always a personal choice. Maybe you really like your current car and feel like keeping it. Or, perhaps, you've decided to buy rather than lease your next one and are considering choosing a used car this time.
- When it's time to get a new car, buying and leasing are the two main ways to drive away with a vehicle.
- Buying, whether with cash or with a loan, means you own the car 100%. Over time, owning a car can be more cost effective - but you'll also have to pay for repairs and upkeep.
- A lease may come with lower monthly payments than an auto loan, but you'll only be able to keep your car for a few years - and you'll typically also face mileage restrictions.
- With a lease, however, you will always experience a relatively new vehicle every time you renew.
The leasing firm's asking price is obviously a key factor. There are also some overall benefits to purchasing your existing car. For one, you know the car’s history, which is an advantage most used car buyers don’t have. This is especially true if you’ve pampered the car while it was in your care. Are you the type of driver who meticulously goes in for an oil change when it’s due? Do you keep your car in a garage year-round to maintain an immaculate finish? If so, you'll be buying a car that you know is in excellent shape.
Ironically, buying the automobile can also be a plus if you haven’t treated the car particularly well. Most leases include extra fees for unusual wear and tear on a vehicle, which may show up during the inspection. Keeping the car is a way to stave off that extra expense.
Those who put a lot of miles on their car may also save some money by purchasing it when the lease comes to an end. These contracts typically have an annual mileage limit; if you go over, you’re assessed a fixed charge for any extra miles. Take, for example, a three-year lease with a 12,000 mileage limit. By the time the lease expires, the leasing company is expecting you to return the car with fewer than 36,000 miles on it.
But let’s say you make long trips on a regular basis and racked up 45,000 over that stretch. If your lease has an overage fee of $0.15 per mile, you’ll have to pony up $1,350 when you return the car; some overage fees can reach $0.25. By purchasing the car, you don’t have to worry about that additional surcharge.
Doing the Math
Of course, these potential benefits are only part of the equation. For most drivers, the biggest question – after "Do I want a new car?" – is whether the purchase price constitutes a good deal. The majority of leases will include a “buyback price,” the amount you’ll have to pay if you’d like to hold onto the car. It’s a quirk of the leasing industry that this buyback price is actually determined before you begin your lease. The reason is that, in order to determine your monthly payments, the leasing company has to estimate how much the car will depreciate during the course of the contract. Your monthly outlay is essentially the sale price of the car minus its residual value when the lease is up, divided by the number of months on the contract.
Take a sedan that goes for $25,000 new. Over three years, the leasing firm projects that the car will be worth $15,000. That $15,000 residual value becomes the basis for the buyback price. Some leases contain a buyout fee, which can take make the final price slightly higher. But here’s the thing: Sometimes the company’s estimate is off. It’s hard to predict all the factors that can affect resale value years ahead of time. Before deciding whether to buy your leased car, you’ll want to compare the buyback price from your lease to the current resale value of the car.
Sources such as Kelley Blue Book, Edmunds, and NADAguides are good places to start. To get the most accurate prices, make sure you enter all the options your car has, where you live and the exact number of miles on the odometer, as well as an honest assessment of the condition of the car. Some experts suggest using the “private-party” price to steer your decision rather than the higher dealership cost. If you can acquire the automobile for less than its current market value and you like the car, buying it from the leasing company probably makes financial sense. But even if it looks like you’d be overpaying slightly at first glance, buying the car can still be a good idea.
Say the vehicle has a buyback price of $20,000, and a similar car is worth $19,000 from a private seller. For some folks, the fact that they know the car inside and out might make up for a slightly inflated price tag. If the driver faces mileage charges when they return the car to the dealership, the decision gets even easier. Suppose the overage fees total $1,500. If you factor in these fees, the true cost of buying a similar car elsewhere is actually $20,500 – less than the price of the buyback.
Negotiating the Price
In most cases, haggling with the leasing company won’t bear much fruit. This is especially true of brand-specific leasing companies, which have a reputation for standing firm on their buyback price. If the leasing company is a bank or credit union, experts say you might have better luck. Bear in mind that these lenders have to unload that car somehow, either by selling it to a dealership or putting it on the auction block. Sometimes, they’re looking to avoid the time and expense that goes along with selling the car to a different buyer. As such, it might be worth finding out who’s underwriting your contract and try to negotiate.
The Bottom Line
Deciding what to do with your leased vehicle sometimes requires a little math. It’s a good idea to compare the buyback price to what the car would go for on the open market. Don’t forget to factor in any additional charges, such as mileage fees that could make buying the car more attractive.
Should you decide to buy the car and would need to take out a loan to do so, it's important to consider what kind of price, down payment, loan term, and interest rate you can afford. An auto loan calculator can be a huge help in this endeavor.