As Interest Rates Continue To Rise, Should You Consider Buying Out Your Car Lease?

Car dealer is giving key for a new car to a woman.
praetorianphoto / Getty Images

The pandemic-induced chip shortage and supply chain issues made it a difficult — and pricey — landscape for potential car buyers in recent years. As of Jan. 15, Bloomberg reported that analysts expect a reversal for 2023, with a drop in prices due to a resuming of supply and lower demand. However, prices continue to be high due to soaring interest rates.

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Per Kelley Blue Book, the average new car sold in November cost a record high of $48,681, which is $422 higher than in October and $2,250 higher than December 2021. The average buyer has paid more than the manufacturer’s suggested retail price every month since July 2021, according to Kelley Blue Book.

Against that backdrop, consumers whose lease might soon end are faced with a difficult choice, as “it will likely cost them hundreds more a month to either get a new lease for the same car or to lease a newer version,” according to Bloomberg. In turn, because of high interest rates, it might be wiser to stop leasing and go ahead and buy a car.

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“If you can afford to put more money down, you could wind up with a similar monthly payment as leasing, but own the car outright,” Bloomberg added.

Another benefit is the trade-in value, as prices for used cars have dropped from their recent pandemic-induced highs. Indeed, the index for used cars and trucks dropped 2.5% in December, according to the latest Consumer Price Index (CPI) data.

Consumers should note, however, that a lease buyout probably means the end of any service warranties.

Automotive research company Edmunds found that consumers who buy a car today “are at risk of going underwater on car loans down the road as financing costs rise, [and] used car values decline.”

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Financing a new or used vehicle is growing more expensive than ever for consumers, as the average annual percentage rate (APR) on new financed vehicles soared to 6.5% in Q4 2022 compared to 5.7% in Q3 2022 and 4.1% in Q4 2021.

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Meanwhile, the APR on used financed vehicles rose to 10% in Q4 2022 compared to 9% in Q3 2022 and 7.4% in Q4 2021, Edmunds noted.

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About the Author

Yaël Bizouati-Kennedy is a full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She also worked as a vice president/senior content writer for major NYC-based financial companies, including New York Life and MSCI. Yaël is now freelancing and most recently, she co-authored  the book “Blockchain for Medical Research: Accelerating Trust in Healthcare,” with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in Journalism from New York University and one in Russian Studies from Université Toulouse-Jean Jaurès, France.
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