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Refinancing A Leased Car: The Complete Guide For 2...

Vehicle Tips, Car Buying Tips, Money

By Jack Lightner | 9/3/19 11:00 AM | 0 minutes to read

Leasing a car has become a popular alternative to buying one. Since early 2017, around 30% of all new vehicles in the US have been leased. Instead of paying the full price at the dealership, you’re essentially footing the bill for the depreciation of the vehicle.

Leasing a car does mean monthly payments, which can be expensive. According to Experian, the average 3-year lease payment for Q1 2019 was just over $450 a month. Of course, that’s not including other fees baked into your lease contract including upfront costs, mileage/maintenance fees and end-of-lease fees.

If you’re in the position where you can’t afford your payments, or you just want to save some money, you can refinance your lease to lower your monthly payments. But, it’s important to understand that refinancing a lease is different than refinancing a loan. In this case, “refinancing” your lease simply means taking out a loan for the value of the car and then making the monthly payments on that loan.

Can I lower my payments on a leased car?

If you’re facing financial hardship, it’s possible for you to contact the leasing company, as they may allow you to delay payments. However, this doesn’t mean they’ll lower your monthly payments.

Once a lease has been signed, there’s no way to change the monthly payments that are specified in the contract between you and the leasing company. You can’t renegotiate your lease in the same way you can refinance a car loan.

If you want to lower your monthly payments, you’ll need to find a way to get out of your contract.

To get out of your contract, you’ll either need to refinance your lease, or use a program such as a lease transfer, or lease buyout in order to get to a more affordable payment.

Should you refinance a lease?

If you truly can’t afford your car lease, refinancing it is one option to lower your monthly payment, but you may be better off just selling the car after getting a loan. It all depends on your personal financial situation.

Refinancing a car lease is one option to reduce your monthly payments, but not the only one. You can also:

  • Transfer your lease. You’ll pay a lease transfer fee and may remain liable for the car after it changes hands.
  • Return the car and lease another one. You may avoid a termination fee if you do this with the company you originally leased from.
  • Lease pull ahead. If you’re close to the end of your lease, you can sometimes skip the last few payments and lease a new car.
  • Buy out the lease and sell the car (dealer or private party). This is the best option if you’re truly struggling to pay your lease.

Refinancing is the best option if you have good credit and you want to lower your monthly payments. It can also help you avoid fees that are part of your lease. For example, refinancing your lease will help you avoid:

  • Mileage Fees.
  • Maintenance Fees
  • Wear and Tear Fees
  • Lease Cancellation Fees

Refinancing can also help you preserve any equity that you have in your car lease. For example, if the value of the lease buyout is less than the value of the car, you’ll be able to collect the difference if you sell the car.

How soon can you refinance a car lease?

All lease contracts come with the option to buy out the lease as soon as you walk off the lot, assuming you have cash in hand.

This means you can refinance a car lease as soon as you want. Theoretically, you could refinance a lease as soon as you sign the contract, if there’s no provision against a buyback. Check your lease contract for this information.

Because refinancing a lease means applying for credit from another source, assuming you can secure a loan, you’ll be able to buy out the lease!

This flexibility makes refinancing a lease an attractive option for lowering your monthly payments or getting out of your contract early.  

How does lease refinancing work?

Refinancing a lease means you become the owner of the car. The process is simple. You ask for the payoff amount for your car, and then secure a loan for this amount and purchase the vehicle. This does mean you can refinance your lease whenever you want, assuming you can get a loan for the value of the car.

However, if you choose to refinance early in your lease contract, you’ll still be on the hook for all your payments. They’ll be added in to the lease buyout amount.

Then, instead of paying lease payments, you’ll be making payments on the loan. You’ll no longer be subject to any terms of your lease, including any of the fees associated with a lease.

Whether or not this lowers your monthly payment depends on your credit score, the interest rate on your loan, and the loan term.

Disadvantages of refinancing a lease

While you can always wait until the end of your lease to buy your vehicle, if you want to refinance it during the lease, you’re going to have to pay other fees upfront. It’s very likely you’ll pay an early termination fee which is usually between $300-$500. There may be other fees that apply, and it’s worth checking your lease paperwork to determine which may affect you.

You’re also going to have to pay any applicable state taxes, transfer costs, and potential purchase options. Assuming you leased a new car, this amount can be in the thousands, and you’ll have to include this amount in the loan.

Although you’ll own the car, the additional money you’ll have to borrow may cause the monthly payment to be more expensive than your lease contract. Your loan will also have a higher interest rate then a new car loan, because most leased cars are considered used.

There’s also the added downside where you could end up upside down on your loan, if the payoff amount is higher than the residual value of your car. If you end up deciding to sell, you’ll have to cover the difference.

How to refinance a leased car

As we learned, refinancing a leased car means buying out the lease using a loan. To get there, you’ll need to take several steps.

The first is to figure out your lease payoff amount. This amount should be in your lease, but if it isn’t, you’ll need to call your leasing company.

The payoff amount takes into consideration the expected residual value of your car, plus the amount owed (including interest). This figure also includes depreciation.

Your car depreciates by about 20% in its first year off the lot, and then stabilizes to around 10% a year afterwards.

To get an estimate of your residual value, use either calculator below.

Cars.com Book Value Calculator

KBB Book Value Calculator

Once you have an idea of the residual value, you’ll need to add in your remaining monthly payments. Simply take your current monthly payment and multiply it by the number of monthly payments remaining.

For example, let’s say you leased 2018 Toyota Corolla for 3 years, and the car is worth $14,000 at the end of your lease, and you still have $3,500 in total payments left.

Your payoff amount will be $14,000 + $3,500 = $17,500.

Once you know your payoff amount, you’ll need to find a refinance lender, or otherwise secure a loan for the full payoff amount. Local credit unions are a great resource.

You can negotiate the payoff amount

Some companies have a no negotiations rule when it comes to buying out your auto lease. However, it can’t hurt to try. If you were to return the vehicle, the leasing company would have to sell the car to a dealer or an auction. To avoid this, your leasing company may be willing to negotiate the payoff amount with you.

To have the best possible leverage, you need to know what your car is worth.

How to negotiate your payoff amount

The buyout price you’ll be paying might not be competitive, to the point where you’ll lose significant money in the transaction. If you’re considering refinancing for financial hardship, you need to know the numbers involved before doing anything!

Start by using Kelly Blue Book calculator, or the cars.com book value calculator to find the fair value of your car.

Then, compare your car’s buyout price to the fair value price. If the car’s fair value is above the buyout price, congratulations. You have some equity in the car. Chances are, your leasing company won’t want to negotiate the buyout agreement if this is the case.

However, if the fair value is less than the buyout price you should try to negotiate.

There’s two ways to go about this, depending on how much time you have left on your lease.

If you have only 2-3 months left, the lease company may call you to potentially negotiate a buyout. If you can, it’s best to wait in this situation. They’ll be the ones coming to you, and may offer you a better deal. Otherwise, you’ll have to call them.

Tell them that you have cash in hand but want to negotiate the payoff amount. You’ll have more luck the older your car is, as the lease company won’t want to take back an older vehicle if they can receive cash and not have to be liable for selling the car.

Refinancing a leased car with bad credit

The good news: you can refinance a lease with bad credit. The bad news: it’s going to take some work! It can be done though.

First, let’s define bad credit.

According to Credit.com, anything below a 600 on an 850 scale is considered bad credit. With a credit score below 600, it’s going to be more difficult to secure credit terms, but it can absolutely be done.

Once you know the buyout amount, you’ll need to find a lender that specializes in bad credit.

The lender should:

  • Have low credit score requirements
  • Accept lease buyout loans (some banks and lending institutions don’t)
  • Float you a big enough loan to cover your car’s payoff amount

Supermoney.com has a great list of low-cost lenders you can check out. There’s also lending tree, which also covers lease buyout loans.

Try to secure as many quotes as possible. Comparison shopping will save you money!

Auto loan rates can vary greatly, and you’ll end up with a better rate if you can get quotes from at least 3 different companies.

What other options do I have?

Replace Your Car Lease (Return the car and pay penalties)

Replacing a car lease is an option to consider, although it can be prohibitively expensive. To replace a car lease, you simply return your car, pay the early termination fee and any depreciation and then get a new car lease.

The leasing company will then sell your car at wholesale and then reduce the payout by the amount they get from the auction.

Most leases do come with an early termination clause, but the penalties can be steep. You’ll have to pay a one-time fee, and often the value of the depreciation remaining on the lease. The payment can be thousands of dollars. 

You’ll have to compare the costs you pay upfront to terminate your lease compared with the money you’ll save over the course of your new lease. It’s possible that you’ll be on the hook for your remaining payments.

We don’t recommend attempting to replace your lease – mostly because of the prohibitive cost of doing so. If the reason you’re looking to reduce your lease payments is because of financial hardship, returning your car is not a great option because of the cost.

Transfer Your Car Lease

You also have the option to transfer your lease to another party. Transferring your lease is like subletting your apartment. You pay a lease transfer fee, which is anywhere from $200-$550, and the other person can then take over your leased car.

Much like subletting an apartment, each automaker has different rules about lease transfers. Certain automakers and leasing companies do not allow transfers, while others won’t allow you to transfer within the first 6-12 months.

There are also automakers including Volkswagen and Audi, who hold the original lease holder liable if the new lease holder fails to make payments on the car. You may also be held liable for any major damage done to the car by the new lease holder.

We recommend consulting your leasing company before you decide to transfer a lease. Ask them about any outstanding liabilities after the transfer.

Finding someone to swap with you doesn’t have to be difficult. Websites like LeaseQuit, LeaseTrader, and swapalease will help you find someone to take your lease and handle all the paperwork.

Each company will match your lease up with a network of people who want to talk it over. Once they find someone who wants your lease, they’ll move you through the process, and then you’re out of your lease.

Buy The Car And Sell It

When you refinance your car lease, you become the owner of the vehicle, and responsible for the loan payments. However, if you’re feeling entrepreneurial, you can try to sell the car.

If you’re struggling to make your lease payments, the best option is to sell the car and then try to save and pay cash for a vehicle you can afford.

Compare the difference between the current buyout price and the fair value price as determined by KBB. If your buyout price is lower than the fair value, you have equity in the car and will get that out once you sell it. If the KBB value is lower than the buyout price, you’ll end up with negative equity and you’ll have to eat the loss.

If you can’t make your lease payments and have negative equity, you’d often be better off trying to transfer the lease if you’d end up owing several thousand dollars.

If you choose to sell the car, you’ll have to choose between a private party sale, or a dealership sale.

Dealership

If you choose to go the dealership route, take your car to any dealership and see if they’ll make you an offer. If the dealer wants the car, they’ll offer you the trade-in price.  This will be less than if you sell the car yourself to a private party, which is why we don’t recommend it as a first option.

Private Party

You’ll make more money on a private party sale, but will be required to prepare any documents, including the bill of sale, and a highly recommended Carfax or AutoCheck vehicle history report. Websites like Craigslist, Autotrader, eBay Motors, and Facebook Marketplace are all great options to sell your car.

If you live in Alaska, Montana or New Hampshire, you won’t have to pay sales tax. Arkansas (sale price <$4,000) and Oregon (used vehicles) also have laws on the books that won’t charge you if you meet their conditions.

If you live in any of the other 45 states, your buyer will have to pay sales tax, and you’ll need to send it to the government. Don’t forget to remit the sales tax, because some states like Florida will assess you a late fee if the sales tax is paid more than 30 days late. 

Lease pull ahead

Some manufacturers offer lease pull ahead programs in order to keep you as a customer and avoid having too many of the same vehicle on the lot. A lease pull ahead program allows you to skip the last few payments of your lease and give the car back early in return for another vehicle.

There are two types of lease pull-ahead programs, one from the carmaker and another from the dealer.

A carmaker’s pull-ahead program will usually be very clearly defined. Most wave between 3-5 payments, while others waive fees for excessive mileage or other damage. Regardless of the benefits, you’ll be clear as to what’s being offered.

A dealer’s pull ahead program will often be vague, where the dealership will often promise low payments or no money out of pocket. Without having their offer in writing, it’s hard to say what each dealership is offering. What we can tell you, is to carefully read any contract before signing.

Dealership buyout

Some dealerships will buy you out of your lease if you purchase another car with them. They’ll usually offer this in the final year of your contract. When reviewing a dealership buyout, read the contract language carefully. Some dealerships will charge you for a lease transfer. The upside to this arrangement is you’ll get your payments forgiven, and you can switch to the more affordable vehicle that you need.

The downside, is dealership buyouts are only available in the last 6-12 months of your lease.

Which should you choose?

Which option you choose depends on the situation you find yourself in! Let’s break down which option is best for you.

Refinancing your lease

Best choice if:

  • You have a good (700+) credit score, and don’t mind owning a car.
  • You’re okay with paying monthly payments, you’d just like them to be a little bit lower.
  • The KBB fair value of your car is higher than the buyout price. Refinancing your car will preserve that equity.
  • You want to get out of your lease well before it’s set to expire.
  • You really love your car and want to keep it.

 

Returning Your Leased Vehicle

Best choice if:

  • You needed to be out of your lease yesterday and are willing to eat thousands of dollars in early termination fees, and depreciation penalties. Otherwise, returning your leased vehicle makes no sense.

 

Buying Out Your Lease, Then Selling Your Car

Best choice if:

  • You have good credit (700+), but you are having trouble affording your monthly lease payments.
  • Also, a great choice if you have weaker credit and can’t afford your payments.
  • You need to get out of your lease well before it’s set to expire.
  • The fair value of the car is higher than the buyout price.
  • You live in an urban metro where it’ll be easy to quickly turn the vehicle over with a private party sale.

Lease pull-ahead/dealership buyout

Best choice if:

  • You’ve got less than a year left on your lease and want to get into a new vehicle, or potentially lower your monthly payment.
  • You can afford a lease payment – but it would be nice if the monthly cost was a little less.
  • You’ve found a great incentive from a manufacturer, or through Edmunds new car incentives. https://www.edmunds.com/car-incentives/
  • You’re comfortable with the manufacturer or dealer you’ve previously leased from and want to sign another contract.

Protect Your New Car After You Buy It Out

Lease contracts can be expensive, which is why it makes sense to explore refinancing a lease to lower your monthly payment. You can also look at dealer programs if you are at the end of your lease.

If you end up deciding to buy out the car, you want to make sure you’re covered as a new car owner.

Car repairs can be more expensive than your monthly lease payments, and unlike a predictable lease payment, they're always a surprise. The last thing you’d want to do is get out of your lease, only to be hit with a costly repair like a transmission replacement, which could set you and the new car you own back several thousands of dollars.

With a policy from Protect My Car, instead of paying around $2,000, you’ll just pay the $100-dollar deductible, and we’ll cover the rest.

Plus, having an extended warranty from Protect My Car can be a great selling point, especially for a private party sale. These contracts are fully transferable to the new owner and pay the cost of your repairs. That’s a great gift for any new owner, and will give them peace of mind.

Better year, our vehicle service contracts come with 24/7 roadside assistance, and free oil changes and tire rotations.

So, if you’re thinking about buying your way out of a lease, consider protecting your new asset with one of our great plans.

Get a free, no obligation quote from Protect My Car, and stop stressing about repair costs. 

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