Lease Buyout Loan vs. Auto Financing: What to Know Before You Decide

Thinking about a new car? You may be wondering whether you should lease a vehicle with the intention of purchasing it later, or finance a car from the start. Both are effective paths to vehicle ownership, so how do you know whether you should lease and buy vs. lease? 

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In our guide below, we’ll break down the real costs and trade-offs of each method, plus show you some scenarios where each strategy makes the most sense.

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Key takeaways

• Two ways of buying a car are to finance the vehicle with a loan, or lease it first and buy it when the lease expires.
• Leasing to own can cost more than financing, but it offers more flexibility if you change your mind later.
• It can make sense to lease the car first and buy it later if you need smaller payments at first.
• Buying out a lease can also make sense for people who want more time to learn whether they like the vehicle before committing to purchasing it.

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Paths to car ownership: Lease to buy vs. finance

If your end goal is to own a car, there are two paths you could take to get there. You could lease the car first, and then do a lease buyout when the lease expires. Or, you could finance the purchase from the outset.

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Financing the vehicle lets you own the vehicle right away and pay it off over time. Leasing with the intent to buy later lets you get to know the car, its quirks, and how it drives before you purchase it. 

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The difference between lease and buy vs. lease is what happens to the car. With a lease, you return the car to the dealership when the lease expires. When you lease to buy, your end goal is owning the car, not returning it.

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Which costs more: Leasing to own or financing?

Leasing to own can cost you more than financing primarily because of the fees and charges associated with a lease. Leases often require fees such as an acquisition fee or purchase-option fee. If you lease to own, you’ll need to pay these in addition to the typical fees for financing a purchase, which can include dealer document fees, title transfer fees, and registration fees. Financing from the start means you can avoid paying leasing costs as well.

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When it makes sense to lease first, then buy

Although it’s usually more expensive to lease and buy vs. lease, there are times when leasing first and buying later makes sense:

• You want an extended, years-long “test drive” to make sure you truly love the car before purchasing.
• Payments are typically lower when leasing, which could help your cash flow during the first few years.
• You know the history of the car and how it’s been maintained, because you’ve been the one driving it.
• You want the flexibility to walk away at lease-end if the car’s not right for you.

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If you love the car and don’t want to wait until the lease expires to buy, often you can buy out a car lease early. It typically requires paying the remaining lease payments, plus the residual value and fees.

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When it’s smarter to finance a car purchase

Sometimes it’s better to skip the lease and finance the car purchase instead. That might be the better option for you if:

• You know you want to keep this car for the long term.
• You expect you’ll need to put more miles on it than the lease agreement allows (typically 12,000 miles/year). 
• You want to customize your car, perhaps with window tint or exhaust modifications, which is typically not permitted on a lease.

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If financing is a better option for you, but you’re concerned about interest rates, remember that auto loan refinancing can help. Instead of waiting to buy the car and hoping rates come down, you can buy the car now and refinance the loan down the road.

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Make sure a lease buyout works in your favor

When it’s time to purchase your leased car, make sure you do your research. 

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First, look up your car’s current market value and compare that to the residual value. 

• If your car’s value is less than the residual value in your lease, you might be overpaying for the vehicle.
• If it’s worth more than the residual value, you’re getting a good deal. 

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Next determine the total lease buyout price. It’s common to use a lease buyout loan to finance the purchase of your leased car. This lets you spread the payments out over time.

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To find the best lease buyout loan, shop around and compare offers from multiple lenders. RefiJet is a great resource for finding the right lease buyout loan. You can compare multiple lenders and choose the right payment, interest rate, and loan term for your needs. 

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Check out our guide to the auto lease buyout process to learn more about finding the best deal and what you need to apply.

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FAQs

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Here are some frequently asked questions about lease buyout loans vs. auto financing.

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What are my options at the end of a car lease?

When your lease is up, you can return the vehicle to the dealership or you can choose to buy your leased car. Lease buyouts let you keep the car you’ve been driving, and you can finance the purchase with a lease buyout loan.

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Is a lease buyout loan cheaper than financing a new car?

A lease buyout loan can be cheaper than financing a new car because you’re only financing the residual value amount instead of the whole car (minus a down payment). 

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Can I negotiate the buyout price on my leased car?

The lease buyout price, or residual value, is included in your lease agreement. Because this figure is predetermined by the leasing company, it’s uncommon to negotiate it. However, it’s possible the leasing company may be willing to compromise if the car’s current value is lower than expected. 

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What credit score do I need to qualify for a lease buyout loan?

The credit score required for a lease buyout loan varies by lender. However, lenders tend to offer their lowest rates to borrowers with good or excellent credit.

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How do I apply for a lease buyout loan with RefiJet?

It’s simple to apply for a lease buyout loan with RefiJet. You can fill out a quick form to get started. We’ll ask for some details about you, such as your name, date of birth, and address. You can speak directly to an agent over the phone to review your loan options and apply.

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