Leasing a Car, Part 3: Options at Lease End

Thanks for sticking around for the final post in my three part series on automotive leasing! In case you missed any of the previous posts, I’ll link them here:

Leasing a Car, Part 1: Is It Right For You?

Leasing gets a bum rap from some financial experts. But while it’s certainly not right for everyone, for some consumers, leasing can be a smart move.

Leasing a Car, Part 2: Down Payments & Gap Insurance

Here in Part 2, I’ll talk about what determines your lease payment, down payments when leasing, and the always sexy concept of gap insurance.

Part 3 is all about what happens at the end of your lease term. What do you need to be prepared for if you want to turn in your car? Does buying your leased car at the end of your lease make sense, and is it a smart financial move? Read on!

At the end of your lease term, you have two options. You can turn your car in and walk away, or you can buy it for the predetermined residual cost (or as I’ll also refer to it, the buy out).

Turning in: Fees & penalties

The beautiful part about leasing is, if you want to turn it in at the end, you can. You’re free to go pick out something new and shiny to drive instead. But you need to be aware of potential additional charges. Many lease agreements require you to pay a disposition fee at turn in, but you may also be on the hook for mileage or damage penalties, too.

If you’ve gone above and beyond the mileage allowance provided in your contract, you’ll need to pay anywhere between $.15-.30 per mile for the overage. Also, your car will be subject to an inspection for damage. Generally speaking, you may be dinged (pardon the pun) for any scratches or dents larger than a credit card. I have heard stories of dealerships waiving minor damage penalties if you sign a new lease from that same brand. But, it’s always best to keep a leased car (or any car, for that matter!) clean and in good condition.

Mileage overages and damage penalties can add up quickly. If you aren’t prepared to pay those fees but you have the means to finance the residual cost, buying it could be a better option.

Buying out: It might be a good deal

Buying the car you’ve leased for the past several years can be a great option. In a way, it’s like purchasing a used car, except you were the car’s first owner. You know the car’s complete history and the level to which it has been maintained.

And the buy out price on leased cars can be quite appealing, compared to the retail prices you’d pay on a comparable used car. For example, as of this writing, Honda has a lease offer on their website for the popular CR-V crossover. In LX trim with all-wheel drive, a three-year lease with 12,000 mile-per-year allowance has a residual price of $17,217. A check on Kelley Blue Book shows that today, three-year old Honda CR-V LX AWDs with 36,000 miles have a Fair Market Range of $18,576-20,973. A quick inventory search on AutoTrader showed actual listings in my area for CR-Vs priced on the higher end of that scale. In this example, not only is buying your own leased car less of a gamble than a used car would be otherwise, but it in this example it might save you over $3,000 as well.

Graphic of Honda CR-V comparing leasing buy out price to regular used retail prices

Again, as I mentioned above, buying out could effectively be your only option depending on the fees for any damages or mileage overages if you chose to turn your leased car in. Note that when you’re buying out your car, mileage or damage fees do not apply.

Plus, you might be able to share that good deal with a family member

Back in my first post on leasing, I talked about why I chose to lease a 2013 Toyota Prius. At lease end, Toyota allowed for either myself, or a family member to purchase my car for the predetermined residual cost. My parents bought my Prius. The buy out price for my car was a great deal for a three year old Prius with about 30,000 miles (I was under the 36,000 mile lease cap). Plus, it had been perfectly maintained and obsessively cleaned over its life with me. I’ll have you know it still smelled like a new car!

The total cost of buying out

Many lease a car with the intention of financing the buy out price at the end. They view this as a way to effectively purchase a brand new car, but have monthly payments that fit their budget. However, I’ll show that this approach can make a new car more affordable month to month, but in the long term, the car is more expensive. I’ve broken down a few different buying scenarios below. All are before sales tax, assume excellent credit, and are for illustrative purposes.

Let’s return to that Honda CR-V LX AWD from above. That vehicle has a MSRP of $27,770. First, let’s disregard leasing for a moment. If you took out a traditional car loan for the CR-V, Honda currently has a special financing offer available for 1.9% interest on a 60-month loan. Financing your purchase this way, your $27,770 CR-V would cost $29,160 over the five years, at $486 per month.

If you leased for three years, and then cut a check for the buy out

Returning to leasing, there’s a special lease offer on the CR-V as well. With no down payment, a $0 first month’s payment, and 35 remaining monthly payments of $330, the total cost to lease this CR-V would be $11,550. If you leased your CR-V for the first three years, and then had the means to cut a check for the buyout price at lease end of $17,217, the total cost of your Honda is $28,767 – less than if you financed the entire purchase.

If you leased for three years, and financed the buy out with a five-year loan

Now, what if you leased the CR-V, and then financed the buy out at the end? Interest rates are always higher on a used vehicle – as of this writing, I’m seeing average rates of 5.03%. So for your three-year lease, your total is again $11,550. Taking a 5-year loan at 5.03% on the $17,217 residual, you’ll have payments of $325 per month, for a total of $19,500. Adding this to the lease payment total, your CR-V with an original price of $27,770 will now cost you $31,050.

Graphic showing total cost of leasing plus financing buy out cost over a 5-year loan

Consider the Reality of Taking Eight Years to Pay Off Your Car…

Note that in this example, the lease payments and finance payments on the residual happened to conveniently stay right around the same amount. The finance payments should easily slot into your monthly budget. But, it increased the total cost of the CR-V by $3,280 (again, before sales taxes and fees). But the real kicker – you’ve taken eight years to own this vehicle free and clear.

Be fearful of negative equity

If you’re going to take eight years to finance a vehicle, make sure this CR-V is going to fit your family’s needs for the bulk of that time. Anytime you’re dealing with a car loan where you’ve put no money down, odds are you’ll be facing some negative equity if you try to trade in that vehicle during the first three-ish years of the loan term. To clarify, for your first six years (your three-year lease, and then around three years into your loan on the buy out cost), you might find yourself financially trapped in this vehicle. For more on negative equity, I conveniently have a blog post about that very topic. Click here!

And once it’s paid off, how long can you enjoy the luxury of not having a car payment?

Once it’s paid off, if you’ve continued to drive 12,000 miles per year, your CR-V now has 96,000 miles. Your warranties have long since expired. While you no longer have a car payment, you’ll likely start facing some more costly repair bills that come along with owning a vehicle with higher mileage. After taking eight years to own your vehicle, you’ll have to decide how long you can reasonably own this vehicle free and clear before you’ll have to tackle a car payment on a new vehicle all over again.

But honestly, this is not to say that I think this is a terrible idea. For some buyers who want a new car and want to own it beyond their lease term, this is a way to make a vehicle fit into their budget that they might not be able to afford otherwise. But there are long-term financial consequences that need to be carefully considered.

In conclusion…

I hope you’ve found this automotive leasing series to be helpful. Leasing can get a bad reputation from financial experts, but there are ways to navigate the world of leasing so that it makes sense.

If I can answer any specific questions for you about leasing, please get in touch. I’m happy to help. And as always, thank you for reading!

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