How to calculate a lease buyout to understand the true cost of your ride

As both new and used cars remain in short supply and inflation squeezes household budgets, many consumers are turning to an often-overlooked option: the lease buyout.

This increasingly popular option allows lessees to purchase their leased vehicle at the end of the lease term or sometimes earlier. It can pay off in today's market.

Car marketplace Edmunds data shows that the average trade-in value of cars that were leased in 2020 is 19% higher than their predetermined residual value—the vehicle's anticipated worth at the end of the lease.

This is prompting many consumers to consider buyouts as a way to capitalize on their vehicle's equity.

However, the decision to buy out a lease is far from simplistic.

You've got to have a real handle on how to calculate a lease buyout to use this option to its full advantage. A miscalculation could cost you thousands of dollars.

If you learn how a lease buyout works and apply the best practices provided below, you can really steer things in your favor.

What is a lease buyout?

A lease buyout happens when someone decides to purchase the car they've been leasing. Instead of returning the vehicle at the end of the lease, they become the owner.

This choice has become more common as people look for ways to deal with the increasing costs of new and used cars.

People often choose to lease for lower monthly payments, to drive newer models more frequently, or to afford a more luxurious vehicle. A lease buyout might then be considered if:

• You've grown attached to the car and want to keep it long-term
• You're facing high mileage fees and buying out is cheaper
• The car's market value exceeds its residual value, making it a good deal
• You've maintained the car well and know its full history

Lease-end buyouts vs. early lease buyouts

Lease buyouts come in two varieties: lease-end buyouts and early lease buyouts.

A lease-end buyout is a more straightforward option, allowing you to purchase the vehicle when your lease term expires. The price is typically the residual value stated in your lease agreement, though there may be room for negotiation.

Early lease buyouts, on the other hand, allow you to purchase the vehicle before your lease term ends. This option can be more complex, often involving additional fees and a different calculation method for the buyout price.

Early buyouts can be advantageous if your vehicle's market value has significantly exceeded its residual value. However, they often come with prepayment penalties and other fees that can offset potential savings.

How to calculate a lease buyout

Calculating a lease buyout amount doesn't need to make your head explode. The formula is actually quite simple when you break it down.

At its core, there are only three figures you have to know to calculate your buyout amount:

• Residual Value: The predetermined amount your car is expected to be worth at the end of the lease. It's usually stated in the lease agreement when you first sign it.
• Remaining Payments: The total of any lease payments you still owe.
• Fees: Additional charges, which may include:

Note that the specific fees can vary depending on your lease agreement, state regulations, and whether you're doing an early or end-of-lease buyout.

It's important to review your lease agreement and consult with your leasing company to get a comprehensive list of all applicable fees in your situation.

Let's look at a practical example to illustrate how this works. Imagine you're leasing a midsize sedan with the following terms:

• Original lease term: 36 months
• Monthly payment: $300
• Residual value: $15,000
• Remaining payments: 6 months
• Early termination fee: $350

Applying our formula: Buyout Amount = $15,000 + (6 × $300) + $350 = $17,150

This $17,150 represents your estimated buyout amount. However, to determine if this is a good deal, you'd need to compare it to the current market value of the car.

Remember, this example is simplified for clarity. In reality, your calculation might need to account for additional factors such as taxes, excess mileage fees, or wear and tear charges.

To simplify the process, many people turn to online lease buyout calculators. Honda and Toyota have their own, but you can also poke around online to find other ones as well.

A great tool as well is the Kelley Blue Book car value calculator, which will help you determine the market value of your car to compare to your lease buyout amount.

It’s also a good idea to talk to your dealership and a financial advisor.

Market value vs. residual value

When considering a lease buyout, two key terms play a crucial role in your decision-making process: market value and residual value. While they might sound similar, these numbers are usually different.

Market Value: Market value represents what your car is worth on the open market right now. It's the amount you could expect to get if you sold the car to a private buyer or dealer today.

This value isn't static. It changes over time based on various factors:

• The car's age and mileage
• Overall condition of the vehicle
• Current demand for that particular make and model
• Economic conditions affecting the used car market

Residual Value: In contrast, residual value is a predetermined amount that your leasing company estimated your car would be worth at the end of your lease.

Unlike market value, residual value is set at the beginning of your lease and remains fixed, regardless of changes in the car market. Leasing companies use industry data and their own projections to set this value, aiming to predict the car's worth several years into the future.

Here’s how those two amounts play out when you’re deciding on a lease buyout. Imagine you leased an SUV with a $20,000 residual value for a three-year term. At lease-end:

Scenario 1: If similar SUVs are selling for $25,000, buying out your lease could be advantageous, saving you $5,000.

Scenario 2: If similar SUVs are selling for only $18,000, you might reconsider the buyout, as you'd be overpaying by $2,000.

This is why you should always research your vehicle's current market value before deciding on a buyout.

Financing options for lease buyouts

When considering a lease buyout, you have several financing avenues to explore:

1. Dealership financing: Often convenient but may not offer the best rates. Some manufacturers like Toyota and Honda provide competitive options through their financial services.
2. Bank loans: Traditional banks typically offer lower interest rates for those with good credit scores.
3. Credit union loans: Often feature lower rates and more flexible terms than traditional banks.
4. Online lenders: Can offer quick approvals and competitive rates, especially for those with excellent credit.
5. Home equity loans: Potentially lower interest rates, but you're putting your home at risk.

You should also think about interest rates, loan terms, and any prepayment penalties when exploring financing options. Your credit score will significantly impact your options and rates, so check your credit report before applying.

How to negotiate your buyout price

Negotiating your lease buyout price can potentially save you thousands.

Start by doing your homework. Research your car's current market value online. If it's lower than the residual value, you've got leverage for negotiations.

Highlight any excess wear or mileage that might decrease the car's value. Be prepared to walk away if the dealer won't budge.

Remember, you have the right to buy the car at the residual value stated in your contract. Some manufacturers have more flexible policies than others.

Don't be pressured into making a decision on the spot – take time to consider your options.

To buy or walk away? The pros and cons of lease buyouts

So, your lease is winding down, and you're at a crossroads: do you buy this trusty steed or bid it farewell? Lease buyouts can am smart financial move in some situations, but not always.

Buyouts are a great deal if the vehicle's market value exceeds its residual value. They also allow you to keep a car you're familiar with and avoid mileage or wear-and-tear fees.

However, buyouts have drawbacks.

If the car's value has depreciated more than expected, you might overpay. You may also owe a hefty termination fee you’re not prepared to fork over in one shot.

You also become responsible for all future maintenance and repair costs. Financing terms for buyouts may also be less favorable than original lease terms. You may decide continuing to lease or exploring other options might be a better choice for you.

Ultimately, the decision depends on a lot of factors. You need to sit down and crunch the numbers yourself a little before heading down that road.