Negotiate an Interest Rate on a Lease Buy Out Car Loan

For drivers who really like the vehicles that they are leasing, there may come a time at the end of the lease when they contemplate a buyout. A lease buyout involves paying the lender what the vehicle is worth according to the lease agreement and taking over ownership of the vehicle. However, in order to get a favorable interest rate on a lease buy-out car loan and get an overall good deal, you'll need to negotiate with lenders.

Steps

Deciding Whether to Buy Out Your Lease

1. Consider simply ending your lease. A buy out is just one of your options at the end of a lease. You can also just end the lease by making your final payment and returning the car. If you are ready to move on or don't like the car any more, this is a perfectly reasonable way to end the lease. However, you may also choose to buy the vehicle at the end of your lease. Do this if you want to keep driving it or if you have incurred excessive damages or wear on the vehicle during your lease. Buying the vehicle will help you avoid paying damage or wear fees.
   • You can also break your lease early. See how to break a car lease for more details.
2. Compare the residual and market value of the vehicle. The leasing company will often calculate your side of the costs based on a "residual value," which is basically the beginning value of the vehicle minus depreciation figures. The total buyout cost is this amount plus your purchase-option fee. You can then determine whether or not the buyout is a good deal by comparing the buyout cost and the market value of the vehicle.
   • To calculate market value, start with your car's blue book value. Use sites like Kelley, NAPA, Edmunds and more to find real market values for your vehicle.
   • Then, consider any damage or excessive wear. If the vehicle has sustained a lot of wear during the lease, it may be worth less than its book value.
3. Compare the cost of buying another comparable used car. In a lot of cases, the residual value for your vehicle will be higher than its market value. This means that in buying out your lease, you will be overpaying for the car. At this point, you can consider simply ending your lease (either early or on time) and shopping around for a similar car. Because the residual on your current lease is higher than the market value, you may even be able to find a used car that is nicer than your leased car (a year newer or with more options, for example) and still costs less than the residual value.
4. Choose between early and lease-end buyout options. If you've decided to buyout your lease, you still have two options to choose from: an early buyout or a lease-end buyout. The lease-end buyout is simply a purchase of the vehicle at its residual value at the end of the lease. The early buyout, however, is more complicated. The amount that you owe the lender in an early buyout is calculated by the lender as some combination of the residual value and the amount you owe on the lease.
   • With an early buyout, the lender may recalculate what you owe and have paid such that your lease payments up to the buyout will be applied towards finance charges. This then increases the balance you owe on the lease, which increases how much you will have to pay to buy it out.
   • In most cases, it is cheaper to wait until the end of your lease to buy it out.

Evaluating Your Situation

1. Get your credit score. Checking your credit score will give you an understanding of your creditworthiness as it will be assessed by the lender when you get a lease buyout loan. Lease buyout loans are essentially used car loans, and often charge a higher interest rate than a new car loan would. This interest rate increases as the applicant's credit score decreases, so understand that you will pay more if your credit score is low.
   • Your credit report can be accessed for free one time per year at Annualcreditreport.com.
   • There are two major credit scores, the Vantage Score and the FICO score. The two scores are calculated with different weight for different categories. Be sure to check both your FICO and your Vantage score, as either could be considered.
2. Make sure you qualify for a lease buyout loan. In order to buyout your lease, you will need to qualify for a lease buyout loan. Like with most loan types, you will need to prove your ability to repay the loan. Specifically, you will usually need a FICO credit score of over 650. In addition, you will have to be current on your lease payments and have a good payment history on the lease so far.
   • You can apply for a lease buyout loan at the end of your lease or before. However, buying out your lease early is typically more expensive than waiting until the end.
3. Understand that the lender will likely not negotiate certain terms. While you may be able to negotiate loan terms like a down payment or the interest rate, it is unlikely that you will be able to negotiate the "residual value" of your vehicle. The residual value represents the purchase price of your vehicle at the end of the lease. This value may be higher or lower than the actual market price of the vehicle. However, this value is typically defined in the lease contract and cannot typically be negotiated.
4. Determine your purchase-option fee. The purchase-option fee is a fee charged when a leaseholder buys the leased vehicle. This fee is usually $300 to $600, but may differ based on the residual value of the vehicle and specific lease terms. The purchase-option fee can be found in your lease agreement. This amount is added to the residual value of the vehicle to arrive at the buyout price.
   • Unlike the residual value, you may be able to reduce or eliminate the purchase-option fee by negotiating with the lender.

Negotiating Your Buyout Loan Interest Rate

1. Allow the lender to contact you about the buyout. Don't call your leasing company about buying out your loan. They will call you before your lease is up to see whether or not you are planning to turn in or buy your leased car. The call means that they are motivated to sell the car and that you will likely be able to negotiate the purchase price and/or the interest rate on a buyout loan.
2. Shop around for better rates. While you are awaiting the leasing company's call, you should shop around for buyout loans. This will allow you to get the best rate possible. Even if you don't go with one of these loans, this will give you a starting point for negotiations with your original leasing company. Look for better rates by contacting local banks and credit unions. You may also be able to get a good rate by using an online financing company. Just make sure that the online company is legitimate first by searching for reviews and complaints from past borrowers.
   • When you've located low rates, get pre-approved for the loan so that you can show the loan rates to your lender.
   • Work with the lender to apply for pre-approval. You will be asked to provide personal and financial information and the lender will check your credit report. If you're approved, you'll be given a loan limit and interest rate.
   • Make sure to specify that you are seeking a lease buyout loan when applying for loans.
3. Attempt to negotiate a lower residual price. When your lender does call, you can increase your negotiating position by saying that you want to buy the car, but are turning it in because the cost of buying it out is too high. It is unlikely, but the lender might be able to lower the residual price.
   • Try saying something like, "I would consider buying out the lease if the residual price were lower. I think the car is worth less than what you are charging for it."
   • Again, it is unlikely that the lender will reduce the residual price. Many lenders refuse to do so as a matter of policy. However, you don't lose anything by asking.
4. Try to get your purchase-option fee reduced. If you can't get your residual price lowered, you can still reduce the buyout price of the leased vehicle. In many cases, the lender will be able to lower the purchase-option fee, reducing the cost of buying the car.
   • Try telling the lender, "The purchase-option price is too high for me to justify buying out the lease."
5. Use your pre-approved financing options to negotiate a lower interest rate. If you were pre-approved for a lower interest rate than your leasing company offers, tell them. They want to earn your business and will likely make an effort to lower the interest rate on the buyout loan. If they don't, however, you still have your pre-approval for the cheaper loan and can go with that one instead. Your leasing company cannot stop you from switching lenders when you get a lease buyout.

References

See also

• Apply for a Used Car Loan
• Redeem Your Repossessed Car
• Transfer a Car Lease
• Get Your Ex Off a Car Loan
• Get a Car Loan While in the Military
• Compare Car Loan Rates
• Buy a Car with Bad Credit
• Find Alternative Finances for Your Auto Loan
• Finance a Car
• Make your New Car Tax Deductible using a Home Equity Loan

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