Lease Payoff Vs. Lease Buyout Amount: What Is the Difference?

Leasing a car has certain pros and cons. The most significant benefit is that you can drive a new car model while paying less monthly than when you have financed it. Nevertheless, most leasing terms last 2 to 4 years, so you could soon have to decide whether to trade your leased car in for another one.

Therefore, it's essential to know the distinction between a lease payoff and a lease buyout amount. Understanding the difference can help you make a well-informed financial decision.

What is a lease payoff amount?

A lease payoff is the total sum you will pay for a car if you want to purchase it before the lease period ends. The payoff includes the equivalent of the remaining payments due until the leasing period is over, the car's buyout price, and, in some cases, a car purchase price. The more you are from the end of the leasing period, the bigger the difference is between the payoff amount and the buyout price.

What is a lease buyout amount?

A lease buyout amount is the total sum to pay if you want to own the vehicle at the end of its leasing period. The buyout amount usually includes the leasing company's estimated car or residential value plus any outstanding charges and taxes. Purchasing out your leased vehicle can be a great option if its current market value exceeds its buyout price.

Is trading in your leased vehicle a good option?

Trading in a leased car is only a viable option if there is equity in the vehicle. If your car is a popular model that has appreciated because of demand in the years since you signed the agreement, there is a high chance there will be equity. Other cases where it might make sense to trade in your leased vehicle include the following:

The vehicle is damaged

A damaged car or an improperly maintained one usually leads to significant penalties when the lease period ends. In such a situation, you might want to look at your lease contract and see how much more you need to pay. Comparing this to your lease payoff amount can help determine whether trading it in beforehand is cost-effective.

You have exceeded the mileage limits

Most lease car agreements have limitations when it comes to the number of miles you can drive the vehicle every year. Exceeding the limit means you will have to pay an additional fee equivalent to the number of miles you have driven over the specified limit. After determining the extra costs, you might conclude that trading in the vehicle or buying it off is a less expensive option.

What to consider when buying out a lease

Buying out your lease might be a great idea if you love your car. However, it might not make financial sense if the numbers don't work. Here are a few factors to consider when determining whether buying out your lease is a good financial move.

Your car's current value

One of the decisive factors in deciding whether to buy out your lease is the amount of money your car is worth in its current condition. Based on factors such as age, make and model, engine size, and current condition, there are various online resources that can help you determine how much your car is currently worth. If the car is worth more than it would cost to buy out of your leasing agreement, buying out your leased car is likely a good idea.

Get multiple financing quotes

It's easier to work with the same leasing agency when financing a buyout. However, you may get a better deal if you discover what other banks, credit unions, and online lenders can offer. Since there are no additional costs for working with another leasing firm, getting a better deal can help you save money.

Showing a company representative that you have better offers may motivate them to offer better deals even when you decide to use the same leasing company. This could include more affordable monthly payments and a lower interest rate.

Ensure the timing is right

Knowing when to make a move is also essential when buying out your leased car. If you want to do so before the lease period ends, ensure you know the lease payoff amount. It might be worth to wait until the lease period is over if the payoff is too high. This can help you avoid any possible early termination costs and give you time to pay your remaining lease payments.

Let the leasing company contact you first

Auto leasing companies usually ask their clients whether they want a new deal a few months before their leasing contracts are over. The leasing company will typically call 90 days before the lease agreement is due to expire.

As with many negotiations, allowing your company to act first can work to your advantage since they wouldn't know you would request a buyout anyway. This might lead to them offering you favorable terms or waiving certain expenses, such as the purchase-option fee. According to financial experts, a purchase-option fee is a sticking point that most sellers are willing to take off the table.

Benefits of a lease buyout

Buying a car you have gotten to know for a few years has many benefits. These include:

You will own an asset

Buying out a lease makes you the vehicle owner. Although it's a depreciating asset, vehicle ownership gives you several advantages that are not available while leasing. For instance, you would no longer worry about over-mileage fees and car modification restrictions. You will also have the right to sell your car at any time and use the money to buy another vehicle outright.

You will end the continuous lease payments

Leasing a car means you will always have to make monthly payments. However, you won't have to pay any payments when you buy it out. This might free up your budget for other financial goals like buying a house. Furthermore, the longer you keep the vehicle after saying goodbye to auto loan payments, the more you can save on transport costs.

You could leverage auto financing deals

Like most car loans, you can finance your auto lease buyout if you are not able to pay cash. The dealership's offer may not be your best choice, so do your research.

Call multiple financial institutions to find a lease buyout auto loan with favorable terms for your needs. While interest rates may be higher on lease buyout loans than a regular auto loan, getting a good offer can save you money in the long run.

When is buying out your leased car a good idea?

There are several situations where buying out your leased vehicle can be worth it. For instance, if the current worth of your car is more than what you have to pay your leasing firm, purchasing it out might make sense from a financial point of view. You can sell it the following day and make a substantial profit.

Get an estimate of your car's current price and go through your lease agreement to find out how much it would cost to buy it out. Ensure you consider any possible additional fees for excess mileage when determining whether it makes financial sense to buy the car. You should also consider the wear and tear you would incur if you returned the car to the dealership instead.

The bottom line

The main benefit of leasing a car is that you can return it to the dealer and walk away when the lease period is over. However, most leasing companies offer a buyout option that allows you to purchase the car at the end of the lease, sometimes even sooner. Whether to buy out your leased car or trade it in depends on factors like the car's condition and value, mileage, buyback amount, and personal preferences.