More Information about Purchasing the Vehicle

If your closed-end lease has a lease-end purchase option, you have the right to purchase the vehicle at the end of the lease term. If you decide to buy the vehicle you are leasing, read your lease agreement to find out what steps you need to take. You need to notify the lessor about your decision in advance. Your lease agreement may also contain information about the purchase-option price and any purchase-option fee.

The purchase-option price will be stated as either (1) a fixed dollar amount (usually the residual value) or (2) an amount to be determined by reference to an independent used-car guidebook, that is, the fair market value (FMV). If the former, you may purchase the vehicle for the stated dollar amount plus any disclosed purchase-option fee. If the latter, you may purchase the vehicle at its FMV at lease-end plus any disclosed purchase-option fee. The FMV-plus-fee amount may be greater or less than the residual value, depending on the actual depreciation of your vehicle. The FMV must be determined by reference to a readily available independent source so that you can verify the purchase price at the end of the lease.

Some lease agreements have a "greater of residual value or FMV" purchase option in which your purchase-option price will be the residual value or the end-of-term FMV price, whichever is greater. Example If you have a FMV purchase option, do some research to determine an estimated value for the car. Many libraries and Internet sites have information on used-car values. You can also check the classified ads in your local newspaper for figures on the asking price for similar vehicles.

When you buy the vehicle, almost all states will charge you sales tax on the purchase price. You will also have to pay title and registration fees. Be sure to include these amounts in your calculations of how much money you'll need to buy the vehicle. Read all your documents carefully, and be sure to ask questions if you don't understand the charges.

You may pay for the vehicle either with cash or by taking out a loan. If you decide to get a loan, it pays to shop around. Even a half-percentage point reduction in the loan interest rate can mean savings; for example, for a $10,000 loan for 48 months, reducing your rate by one-half percentage point saves about $114 in interest costs over the term of the loan. Most loans have higher interest rates for used cars than new cars, although some lessors offer special rates and terms for financing the purchase of leased vehicles. Other lenders have special rates that are between their new-car and used-car rates.

Excess wear and mileage at purchase. If you purchase your leased vehicle at lease-end, you will not be responsible for any excessive wear charges or excess mileage charges that would be due if you returned the vehicle to the lessor. Thus, if you have not followed the excessive wear and excess mileage provisions of your lease agreement, you may wish to consider purchasing the vehicle. If you finance the purchase, purchasing would allow you to absorb these charges over the period of ownership. With an FMV purchase option, your purchase price will usually be a wholesale amount stated for a vehicle having the equipment and mileage allowance in your lease agreement, without any adjustment for excessive wear or the actual vehicle mileage. (Used-vehicle guidebooks usually list several values for the vehicle, depending on its condition and on whether it is being sold in a wholesale or retail market.) Example