Buy or Buy Out: What Should I Do When My Car’s Lease is Up?

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A Closeup portrait of, a young cheerful, joyful, smiling, man holding up keys to her first new car

By Guest Blogger: Penny James

In the wake of the pandemic, the national inflation rate is at a 30-year high, and the car market has experienced extreme price surges. Now that the economy is on a path to recovery, the demand for new and used cars has picked back up.

Unfortunately, for car shoppers, the supply chain has not recovered, and the industry is facing a global shortage of microchips, an essential component in new cars.  Kelly Blue Book notes that even a basic new car, requires over a hundred microchips.  In the early days of the pandemic, the demand for new vehicles waned while so many stayed home.  Microchip suppliers repurposed their stock for personal electronics, which boomed as the world adjusted to remote work and virtual learning. 

Two years into the pandemic, while demand for car purchases have returned, the microchip shortage continues to plague the industry, causing new lease contracts and traditional car prices to skyrocket. 

While microchip suppliers are still focused on catering to other industries, automakers have been forced to slow down on producing new cars. Not only has this reduced the availability of new cars, but it has driven up the prices for used ones in order to accommodate the demand in the market.

If you’re leasing a car and are near the end of your lease, it may actually be better to buy out the vehicle in this current market. It would certainly be prudent to check the current market price of your car. If the buyout price is lower than the current value of your car, you could even earn a profit by selling your vehicle after purchasing it at the end of your lease. Even if you decide to keep the vehicle long-term, it may be more cost-effective than trying to buy an alternative, even a used car could be much more expensive.

Thankfully, most lease contracts have a provision that allows you to buy the car at a set price at the beginning of the lease. The leasing company can’t change the buyout price since the rate of depreciation is precalculated. They arrive at a precalculated buyout price based on past depreciation experience with your car’s model and brand. Usually, this deal favors the leasing company, but now that the prices for new and used cars are so inflated, the buyout price may translate to more vehicle equity and huge savings, particularly if you sell your car to a third party or list it on an online car retailer such as Shift or Carvana.

Buying out your leased car can seem expensive, especially if it’s only a few years old. Thankfully, there are plenty of financing options that can help you out. Your leasing company can usually arrange financing for you, but you may be better of shopping loan terms and rates. This is especially true if you don’t have excellent credit. AskMoney highlights how credit scores are factored into many of the financial decisions in your life. Because your credit score is the numerical equivalent of your “credit worthiness”, having a low score may signify to your leasing company or lender that you won’t be able to dutifully repay your loan. This could leave you with a high monthly payment that includes lots of interest.

An alternative is to get a loan from a credit union. Community chartered credit unions, like Freedom Federal Credit Union, are not-for-profit organizations that are in the service of members that work, live, or are otherwise connected to a specific locale. These organizations are controlled by their members and have a designated board that’s tasked with overseeing all functions of the credit union. Usually, a low credit score won’t automatically disqualify you from accessing a loan. While a good credit score can help you get great loan terms, credit unions will still look at your whole financial picture before finalizing their decision.

All in all, a lease buyout may make a lot of sense, especially if the value of the car in its current condition is higher than the buyout price. Be sure to weigh your options first before settling on a buyout financing option to make sure that you’re making the right decision for your financial future and lifestyle.

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