If you’re considering leasing, you should not just think about the ease of getting into your lease, but also understand your options once your lease term ends. In general terms the three choices you have at the end of any lease are:
- Return the vehicle
- Buy the vehicle at the pre-negotiated price stated in your lease agreement
- You may have the option to extend your lease on a short-term basis
Returning Your Vehicle
This is the most commonly chosen option, because it’s most suitable for the reasons people generally lease in the first place: they prefer to be driving a newer vehicle, don’t want to take on the obligations that go along with ownership, and in general would prefer to return the now-aged vehicle they’ve just been driving for the last 2-4 years for something that is newer, potentially more feature rich, and fully under warranty, even if that’s just the latest iteration of the same model they are turning in. If this is the route you plan to take, remember that your lease agreement will likely have a disposition fee, and this fee will likely be several hundred dollars. This fee will be set by the lessor, not the dealer (in general), so it’s not necessarily something you can really negotiate when you arrange your lease. But it is something you should be aware of, and keep in mind when you begin doing your research and analysis on what you’re going to do when your lease end date arrives.
Even if you could negotiate your vehicle disposition fee, the best time to do it may not be when you are car shopping and arranging your lease, but instead to make it a negotiation point for your next vehicle – whether purchased or leased. In a few years, manufacturers and dealers will still be competing with each other to make another sale – so you will likely find someone willing to effectively waive the fee (or pay it on your behalf, which is the same result) or will have an existing loyalty incentive for current lessees of the brand, or conquest incentive to get you to end your current lease and switch brands, in order to get you into the vehicle they’re selling. If you are returning the vehicle and not shopping for something else you won’t get that treatment, the disposition fee will still likely be a better deal than the hassles of trying to sell the car on your own or better than the price you would have received from a dealership.
You shouldn’t count on having the disposition fee waived, depending on your next move, even if you’re buying or leasing something new you may still have to pay it, so understand that it is a fee for the purpose of getting the vehicle processed for it’s next sale – even if you just put normal “wear and tear” on it, the lessor will likely have to pay some fees to get the vehicle serviced and made ready for sale by the dealer you return it to, or another dealer.
Buying Your Vehicle
When you arrange a lease you also arrange the price where you could buy the vehicle at the end of the lease. In investment finance this is called a “call option” – where you have the option, but not the obligation to buy something at a set price in the future. In the investment world people pay for options, and similarly this is why the lessor charges a combination of the acquisition fee and the purchase option fee – because the lessee/buyer has the financial advantage to only exercise the option if it makes financial sense, and to not bother if it does not.
It’s also important to realize that while you may not have the cash to purchase the vehicle at the purchase price, you can arrange a lease buyout loan for specifically this purpose. Then, you can buy the car you leased and pay it off over time – like getting a car loan on any other used vehicle. We suggest our partner Innovative Funding Services (IFS) if you’re interested in financing your lease buyout.
Getting back to the fees associated with exercising your purchase option: this fee will likely be similar in size to your vehicle disposition fee – but you will only pay one or the other: if you buy the vehicle you pay the purchase exercise fee, while if you decide to turn it in you pay the vehicle disposition fee. Keep in mind that depending on market conditions – either in terms of vehicle sales or loan balance share – your lessor (or the manufacturer) may want to add an incentive to get you to buy the vehicle and will waive the purchase exercise fee. This is worth looking into if offered (assuming you’re at least considering buying the vehicle at lease end), but if they make it contingent on financing with a certain company we still suggest you at least check out our partner IFS to make sure you’re getting the best available deal, even after the purchase exercise fee is waived. It’s very common to save on a fee that can be financed only to pay it multiple times in higher interest charges over the life of the loan – but don’t let it happen to you!
Lease Extension
The last option worth mentioning is extending your current lease for a month or two (or maybe a little longer than that). First off, this is not an option that every lessee will have – the first thing you should do is check your lease agreement and see if this is even an option, if you are inclined to consider this. Second, if it is an option either stated in your contract, or at least not specifically prohibited in the contract, you want to be very careful of the terms that are offered.
Whether stated in the contract or if worked out with your lessor, the most likely payment you’ll be offered is your current monthly payment. That’s not bad, but it is certainly to the advantage of the lessor! To understand why quickly remember this: cars depreciate less each month (at least in dollar terms, if not percentage terms), and therefore making the same payment means that you’re overpaying – because your payment is still the sum of depreciation, rent charge (interest), and tax. To make it even simpler – 39-month leases always have lower payments (not much, but always lower) than a 36-month lease on the same vehicle. So don’t fall in the trap of turning your 36-month into a 39-month lease with a 36-month monthly payment, by simply extending your lease at the same payment.
That said, you likely won’t have much room to negotiate on your payment for the lease extension: either that payment was already specified in your contract, or it’s offered by your lessor later on when you inquire about it. If you don’t want to pay that much you’ll be forced to return the car – which presumably is something you’re not ready to do. So the real advice we have here is that if your situation is such that you need the vehicle for just a little longer than the lease term, inquire about it as soon as you can, so you can compare your other options, but also be prepared to pay for the convenience of a short extension – with a payment that is not as good a deal as you may have gotten in your original lease.