Should you buy out your lease?

A lease buyout is a used-car purchase with an unusual advantage: you already know the car. It is also a used-car purchase with an unusual trap: the price was set years ago, by a formula, without reference to what the car turned out to be worth. The checklist deals with the first fact and the worksheet with the second.

Part one: the checklist

Tick what is true. There is no score; the pattern of ticks is what matters, and a note after the list explains how to read it.

• The worksheet below shows equity at or above zero.If the car costs more to own than it is worth, the other boxes need to carry a lot of weight.
• You know how this car has been treated.Every service, every warning light, every curb. A stranger's used car comes with none of that knowledge; buying your leased car vs another used one weighs that difference.
• Nothing about it is quietly failing.A recurring fault the dealer could never reproduce becomes your fault the day the title changes hands.
• You can handle repairs once the warranty ends.Check when the manufacturer's coverage expires by date and by miles. A car that was free to maintain may not stay that way.
• You would want this kind of car for several more years.Buying out a car you plan to sell next spring is a trade, not an ownership decision. Price it like one.
• Returning it would cost you something.Excess miles, wear charges, or any end-of-term fee the contract names. Buying generally sidesteps these, and that saving belongs in the comparison.
• You have confirmed how sales tax applies.Treatment of lease buyouts varies by state. Your state's tax or titling office, together with your lessor, can say what is owed and who collects it.
• The ongoing cost fits your budget.If you will borrow, the new monthly payment, plus insurance on an owned car, needs to sit comfortably, not just possibly.

Reading it. Ticks on the first box and most of the others: the case is strong. First box ticked but the car-history boxes blank: the numbers work, but you may be buying a known problem, so weigh selling it on instead. Many ticks but not the first: you would be paying more than the car is worth for the comfort of knowing it. That can be a fair trade, provided you have measured the premium, which is what the worksheet is for.

Part two: the equity worksheet

The middle column is for your figures. The right column is an invented example, there to show the arithmetic and not to suggest what any car, state or lessor charges.

Example offers for line F were $21,500, $21,800 and $22,200; the lowest is used. All example figures are illustrative.

Line F is the one to be strict about. Use firm offers from buyers, not an online estimate or the figure you hope for, and take the lowest of three. Anything else flatters the result. If the market is volatile, get the offers close to the date you would buy.

Line G is the equity in the ordinary sense: what you would have if you bought the car and sold it straight away. Line I is the more useful figure for most people, because the real alternative to buying is returning, and returning has its own costs. In the example, buying leaves you $2,200 better placed than handing the keys back, before counting anything the checklist raised.

A negative line G does not automatically mean no. It means the car costs more than the market says it is worth, and the question becomes whether knowing its history is worth that difference to you. If G is well below zero and H is small, returning the car and letting the lessor absorb the shortfall is usually the cleaner answer; that is what a closed-end lease's residual is for. The three possible outcomes are worked through in when your leased car is worth more than the payoff.

If the answer is yes

Then the question becomes how to pay. Cash avoids interest but empties savings; a loan preserves the cushion but adds a cost that belongs on line E. The trade-off is set out rule by rule in paying cash for a lease buyout, or financing it. If you are financing, compare the offer from your own bank or credit union with others, and ask each for the total cost of the loan, not only the payment. Champion Auto Finance is one company that arranges lease buyout financing; it is not itself a lender, and any terms depend on the lender's underwriting.

Whichever way you pay, get the lessor's purchase price in writing, line up the money before the good-through date, and ask who will handle the tax and title paperwork so nothing waits on a missing form. Then keep the worksheet. In a few years, when you are deciding whether to sell, it will remind you what this car actually cost.