Does a lease buyout loan cost less than a used-car loan?

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Is a lease buyout loan a better deal than a used-car loan?

A lease buyout loan finances a car whose price was set in your contract and whose history you know from day one, while a used-car loan finances someone else’s car at today’s market price. When the payoff is fair compared with what similar cars sell for, the buyout usually means a smaller loan and fewer unknowns. The way to be sure is to compare the total cost of each, with tax and fees included.

Illustration only: Priya is a fictional New Jersey driver, and the payoff letter below was composed for this page. Real letters vary in layout and wording.

Why did Priya read her payoff letter before looking at a used SUV again?

Priya’s Nissan Rogue lease in New Jersey was ending in seven weeks. Her phone had a saved listing for another Rogue at a used lot, a slightly newer model year, for $23,500. Her mailbox had the payoff letter for the one in her driveway. She decided she would not look at the listing again until she had read the letter properly, line by line, with a pen.

What did each line of Priya’s lease buyout payoff letter tell her?

Line 1, the lessor and account number. The company named here is the one that holds the title, and it is not always the brand on the car. Any lender she used would need to pay this exact entity. For a Rogue, the Nissan lease buyout page explains who typically stands behind the lease and how to request the payoff.

Line 2, residual value: $19,850. This was the number written into her contract three years ago as the car’s estimated value at lease end. It has not moved since, whatever happened to used-car prices in the meantime.

Line 3, purchase option fee: $300. Her contract charged a fee to exercise the purchase option. Some leases skip it entirely; where it exists, the contract fixes the amount.

Line 4, other amounts due: $0. If she had a late payment or an unpaid ticket on the account, it would appear here and add to the payoff.

Line 5, total payoff: $20,150. The figure the leasing company will accept.

Line 6, good through date. The total is valid only until a specific date. Funding after that means a new quote. She wrote the date on a sticky note and put it on her laptop.

Line 7, payoff instructions. A remittance address and payee name that were different from where her monthly payments went. A lender has to use these, not the monthly payment address.

Line 8, the fine print. “Does not include sales tax, title or registration fees.” Those would be owed to New Jersey when the car was titled to her. For a detailed tour of a similar document, see every line of a lease payoff letter, annotated.

How did Priya weigh an auto loan vs a buyout loan at the same rate on two different cars?

With the letter understood, Priya opened the listing again and built a comparison. New Jersey charges 6.625% sales tax with no local add-on, and the state taxes the buyout price when the car is purchased. The NJ MVC charges $85 for a title when one lien is recorded, and annual registration in New Jersey falls in a $35–$84 band tied to weight and model year. She would owe that whichever car she ended up with, so registration stayed out of both columns.

To isolate the price difference, she used the same hypothetical 7% APR over 60 months for both loans. Real rates come from lender underwriting and could differ between the two cars.

The gap was about $66 a month and close to $4,000 over the loan, before any dealer fees on the other car. The newer model year was nice. It was not $4,000 nice, especially when her own Rogue’s oil changes and tire rotations were all in a folder in the kitchen drawer.

Which payoff letter detail almost tripped Priya up?

When Priya applied, she nearly typed the monthly payment address from her old statements into the payoff section. The letter’s line 7 caught it. A payoff sent to the wrong place can sit unapplied while the good-through date passes, and then the figure needs refreshing. She copied the remittance details straight from the letter, and checked a week after funding that the leasing company had applied the payment.

How do you compare the two loans for yourself?

• Read every line of your payoff letter and note the expiry date and remittance instructions before you apply anywhere.
• Compare totals, not monthly payments, and include sales tax and title on both sides.
• Check that the payoff makes sense against prices for similar cars. A buyout only wins if the payoff is reasonable.
• Ask any lender for the APR, term and total of payments. Our page on what shapes lease buyout loan rates explains the factors.
• Know where to apply. This overview of where buyout loans come from covers banks, credit unions and coordinators.

If keeping your car comes out ahead, the guide to getting your lease buyout financed walks through the application, and New Jersey drivers can read the New Jersey lease buyout page for state specifics.

What else do people ask about auto lease buyout loans?

Keep reading

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