Why not lease a car and then buy it?


If it wasn’t obvious, my post on reasons to lease a car wasn’t really in support of leasing a car, as I think that’s one of more financially foolish moves one can make, even worse than buying a new car. After all, you pay for the bulk of the car’s depreciation, but get none of the long term benefits of owning the car, such as the equity, and the simple benefit of not having to pay for the car anymore.

I bought my car in 2012 outright, which means that for the past six years, I’ve not had to pay a car payment. How much money did I save?

But a good question that might come up at this point is “why not just buy the car from the dealer after the lease is up?“. Perhaps that could be the best of all possible worlds: a lower barrier to purchase mixed with the eventual equity.

You might not be able to

The first reason why not to buy your car after your your lease is done is that the dealer may not allow it. According to Edmunds, since the dealer buys the car from the bank and then sells it to you, accounting may consider it a loss of profit. Generally car dealers don’t enjoy losing money on their cars, so they may disallow it.

A high residual value

But even if they allow it, you might not want to.

In the leasing contract, there is often “residual value” listed, which is the value of your car after the lease is up.

In a perfect world, this would be the total cost of the car minus the amount you paid on it, right?

Look around: do we live in a perfect world?

The residual value could be anything, much more than the car is worth. And it’s definitely in the best interest of the car dealer to make that figure as high as possible, for obvious reasons.

Also, according to Bankrate, by inflating residual values, banks are able to offer lower monthly payments on the leases. So what feels like a good deal at first might come back to haunt you later.

Step away from the dealership

One good rule of thumb is that the more transactions you undertake, the more expensive something will be. Every movement has a little bit of friction to it. This is why day trading doesn’t pay.

The car companies aren’t selling this car out of the kindness of their heart; they’re in it to make money. And if you’re buying the car from the dealer, that’s two transactions instead of one. You can guarantee that this extra transaction is going to contain fees and other fixed costs that are passed on to you, specifically in the form of a “purchase-option fee“.

It might be a good deal

There are some valid reasons to buy the car that you leased. If you’ve dinged up your car, and/or drove well over the maximum permitted mileage, then you’re going to be hit with fees and penalties upon surrender. These are often waived when you buy the car, so the extra money you pay by buying the car might be offset by the penalties you no longer need to pay.

There are other reasons to buy out your leased car but I still would suggest thinking strongly about walking away and starting anew with a quality used car from a private party. It’s worth it to check the numbers and see which makes more sense. But I think I know which one will.

But enough about me. Have you bought a car you leased?

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