How to buy out a lease for the first time, without the near miss most first-timers have

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What are the steps when it’s your first lease buyout?

How to buy out a lease, in short: you get the payoff from the leasing company in writing, check that the car is worth keeping at that price, and pay the payoff, either with cash or with a lease buyout loan. Then your state issues a title with your name on it. The steps are short; the place first-timers trip is the number they borrow against.

What a lease buyout means, in one paragraph

A lease buyout is the purchase of the car you have been leasing, from the finance company that owns it, instead of returning it when the term ends. The lease gives you the right to buy, usually called the purchase option, and the price is written into the contract on the day you sign. How do lease buyouts work in practice? The finance company quotes a payoff, you pay it with cash or a lease buyout loan, and the title moves from the finance company to you, with your lender recorded as lienholder if you borrowed. Three numbers decide what you actually pay: the residual, the contract’s forecast of the car’s lease-end value and the core of the price; the purchase-option fee, a flat charge some contracts add for exercising the option; and sales tax, which most states charge on the buyout price when the car is titled in your name. Title and registration fees come on top. Everything else on this page is about getting those three numbers right before you borrow against them.

What loan amount did Rhea almost submit?

This is an illustrative scenario. Rhea is a composite character, not a customer, and her figures are invented and kept round enough to check by hand.

Rhea had leased a Honda Accord in Brooklyn for three years and liked it more than she expected to. With two months left, she decided to keep it. She found the residual value on page two of her contract, $16,450, and opened a loan application with that figure typed into the amount box.

It felt done. She had the car, the price and the application. The only thing left was to press submit after dinner.

Before she did, a friend asked a question she could not answer: “Is that what they actually want from you, or just what the contract said three years ago?”

What did Rhea’s payoff letter say that her contract did not?

Rhea called the leasing company that evening and asked for the payoff in writing. The letter came the next morning, and she read it line by line using a guide to every line of a payoff letter. Three things were missing from the amount she had typed:

The fee was a simple oversight. The tax was the bigger misunderstanding. She had paid sales tax on every monthly lease payment and assumed that covered the car. New York disagrees. There the buyout stands as its own purchase, and none of the tax folded into those lease bills reduces the tax the buyout triggers. New York City adds 4.875% to the 4% state rate, for 8.875% all in. For how other states handle it, read how buyout sales tax works from state to state.

Had she submitted the original application, she would have been $1,891 short at closing, with the payoff quote’s deadline approaching. Plates and registration were still to come on top; plates cost $25 at the NY DMV, and registration for two years runs $26 to $140 depending on the car’s weight.

How did Rhea fix the amount and buy out her lease from there?

1. She corrected the amount. Her application now asked for $18,341, which covered the payoff, the tax and the title fee. She planned to pay plates and registration herself.
2. She asked who collects the tax. Whether the leasing company or the DMV takes the sales tax depends on how the sale is processed, so she asked rather than guessed.
3. She checked the deadline. The quote was good through a date eighteen days out. She wrote it on a sticky note on her laptop.
4. She compared the offer on total cost. At a hypothetical 7.9% APR over 60 months, $18,341 comes to about $371 a month and about $3,920 in interest. The rate is invented here; real terms come from the lender’s underwriting.
5. She followed the title. Once the lender paid the leasing company, the title moved to her with the lender recorded as lienholder. The lease buyout title transfer guide walks through that last leg.

What she would do differently: request the written payoff before opening any application. Everything else followed from that one sheet of paper.

How do you buy out your lease without Rhea’s near miss?

• Never borrow against the residual alone. Ask for the written payoff and its good-through date.
• Find out how your state taxes a buyout. Some treat it as a fresh purchase; New York residents can start with our New York buyout guide.
• Ask the leasing company how it accepts payment and whether the sale must go through a dealer.
• Check the car’s value against the payoff. If the payoff is higher, decide whether keeping it is still worth it.
• Price ownership, not just the loan. Insurance in your name, maintenance and repairs a lease used to soften are now yours.

The list of common buyout mistakes covers other traps first-timers meet, and the lease buyout financing overview explains the loan itself in more depth.

What else do first-time buyers ask about a lease buyout?

Keep reading

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