Preowned vehicle prices have risen dramatically over the past couple of years. According to CarGurus, the average price for a used Ford on January 1st, 2020 was $20,392. On April 17th, 2022, the average price for a used Ford was $30,455 – an increase of 49.3%.
This trend is far from limited to Fords. Used Jeep prices rose 43.3%; used Toyotas, 50.3%; used Chevrolets – 52%.
This is a great deal as far as leasing companies are concerned. The vehicles their clients leased a few years ago have now appreciated significantly in value. When a lessee returns a vehicle, the leasing company realizes that return on investment on top of all the payments they received throughout the duration of the lease.
But what if you could have that equity instead? That’s the idea behind a lease buyout loan!
What Is a Lease Buyout Loan?
A lease buyout loan provides a lessee with the financing they require to buy leased property from their lessor. If you wish to own a vehicle you are currently leasing, this loan provides the upfront capital you need to make that purchase.
Lease buyout loans have traditionally been popular among lessees who have grown attached to their leased vehicles. But as new and used vehicle prices continue to rise, buyout loans are becoming increasingly popular among lessees who wish to avoid the expense and hassle of buying or leasing a different vehicle once their leases are up.
How Do You Get a Buyout Loan?
Lease buyout loans work similarly to conventional car loans. First the financial institution (typically a bank) determines the amount of money the borrower would need in order to purchase their leased vehicle. The bank then pays that money to the lessor, and the lessee makes ongoing payments to the bank with interest.
Before you proceed any further, check your lease agreement. Many lessors explicitly prohibit buyouts, regardless of whether they are paid for with cash or with a loan. If your lease agreement does not expressly disallow a lease buyout, confirm with your leasing company that they would accept one.
Likewise, buyout loans are not available from all lenders – and lenders which do offer them seldom provide the same rates and terms as one another. It is important to shop around if you wish to secure the most favorable lease buyout loan for your financial needs!
Once you have determined that you may purchase your leased vehicle and received approval for a lease buyout loan, all you have to do is complete the paperwork and transfer the title. In most cases a vehicle will remain in the lender’s name until its lease buyout loan has been paid in full.
Is a Lease Buyout Loan Worth It?
Although vehicle prices are rising, it is still vital to ensure that a lease buyout loan represents a good investment before applying for one. A service like Kelley Blue Book will help you to determine whether your leased vehicle’s market value is significantly higher than its salvage value (estimated value at the end of the lease term). If its market value is indeed greater, then a loan may make sense.
But if your car’s salvage value is higher than its market value, securing a lease buyout loan would mean that you will pay more for your formerly leased vehicle than it is actually worth. Just like a homeowner can be upside down on their mortgage, so too can a vehicle owner be upside down on their lease buyout loan.
Navigating the buyout loan process becomes much easier once you have partnered with a financial institution you can trust. As a lease buyout loan provider in Central Minnesota, the Sherburne State Bank team is standing by to help you determine whether this specialized type of loan would represent a good investment in your financial situation. We welcome you to come visit one of our branches in Becker, Monticello or Princeton in person, or contact us today!