Looking for a way out of the high monthly amounts on your leased car? Refinancing a car lease can help you save money and own the car you rent. In this post, we’ve broken down everything you need to know!
We don’t really need to explain the benefit of taking a car out on lease, do we? Besides being perfect for those who drive less, it also helps avoid excessive post-purchase expenses that can cost you thousands. However, with rising gas prices and rental costs, we won’t be surprised if you find the monthly rental payments excessive as well! That’s where refinancing comes in handy.
Refinancing a car lease can help you out of a tough situation by allowing you to buy the rental car outright – also called a lease buyout. This way, you can reduce your monthly payments and set up a new loan with a better APR and loan term – while also building equity in the vehicle. Let’s find out what car lease refinancing is all about.
What Does Leasing a Car Mean?
When you lease a car, you essentially rent it from a dealership for a certain period of time. Instead of buying it completely and paying off the loan, you pay a monthly rental amount for the period you rent it out.
A typical lease period could be between 36 to 48 months and is written into your lease contract. At the end of your lease period, you can either return the vehicle to the dealer or purchase it at a negotiated amount (also called a lease buyout).
Also read: What is the difference between an auto loan and an auto lease?
Why Should You Lease a Car?
Leasing a car is a great option for drivers who:
- Want a car for a short term – typically less than 48 months
- Drive less than 15,000 miles per year
- Don’t want the hassle of owning a car – like purchase costs, car loan payments, etc.
- Don’t want to invest in a depreciating asset
- Prefer to change cars every 3-4 years
Is Leasing a Car Cheaper than Buying One?
There are several monetary advantages associated with leasing a car:
- Lower monthly payments: The rental payments for a 3-year car lease comes to roughly $450 per month. In comparison, car loan payments for a new car averaged $580 (at least $130 more).
- Maintenance is covered: Most rental agreements include maintenance charges as part of the contract. You needn’t spend too much out of your own pocket if the leased car gets mechanical problems.
- Better resale value: The worst part about owning a car is that the value depreciates from the moment you drive out of the showroom. When you want to trade it in a few years down the line, you might have to haggle quite a lot. However, with a leased car you simply have to return it to the dealer.
- Tax write-offs: Using a leased car for business purposes can give you more tax write-offs than a loan.
However, on the other hand, a drawback of leasing is that you will not be able to build equity in your leased car. Equity is the difference between the resale value of the car and the amount you owe on it. Since you do not own a rental car and cannot sell it, you cannot build equity in it. One way to build equity is by refinancing a car lease instead.
Can You Lower Your Lease Payments?
Sometimes, halfway through the lease period, you may find that the lease payments are too high for you to afford. You may be going through a financial crunch and want to lower your payments to save some money every month. Unfortunately, unlike an auto loan, it is not possible to renegotiate and reduce your monthly car lease payments. The only way you can possibly reduce the financial stress is by getting out of the contract entirely.
The only ways out of the lease agreement are:
- Return the lease immediately and get another leased car
- Transfer the lease to another party; or
- Refinance the lease (lease buyout) and transfer ownership to yourself
How Does Refinancing A Car Lease Work?
Refinancing a car lease – also called a lease buyout – means that you take out a loan to buy the car instead of paying high rental amounts every month. Therefore, after refinancing a car lease, you become the owner of the car. All you have to do is figure out how much the car will cost to pay off so you can acquire a loan for that amount.
As a result, you’ll be making loan installments rather than lease payments. You will no longer be bound by the lease terms or any other related payments. However, whether you can save money through a lease buyout depends on several factors – like the length of your loan, the interest rate, and your credit score.
When Should You Refinance a Car Lease?
Refinancing your car lease is a great option in the following situations:
- If you have a good credit score (above 700) and can afford to take on a loan
- Can afford to buy the car out instead of paying high monthly payments
- If the current resale value of the car lease is more than the buyout price
- You like the car you’re driving and would prefer to buy it
- You want to get out of the lease agreement before the expiration date
How Soon Can You Refinance a Car Lease?
In theory, you could refinance a lease immediately after signing the contract. This means that you can get out of a car lease as soon as you like. As long as you have the cash to pay upfront or have a good enough credit score to take out an auto loan, the dealer will be willing to sell the car to you. However, check the contract to see if there are any clauses against early buyouts.
How to Refinance Your Car Lease: A Step-by-Step Walkthrough
When you refinance a lease, you pay the lender the current resale value of the car and become the new owner.
Step 1: Ask the dealer for the payoff amount on the car lease. The total payoff amount will be higher than the total rental amount because it may include lease termination charges, sales tax, transfer costs, and other fees.
Step 2: Shop around for good refinance deals with banks, credit unions, and online loan aggregators like Way.com. The more choices you get for refinancing, the better. Some of them allow pre-qualification, which means you can avoid a hard credit inquiry at the initial stage. You can also use an online auto refinance calculator to calculate your prospective monthly payments.
Step 3: Choose a deal you can afford, finalize the offer and send in the supporting documents. Once the loan is approved and funded, you can pay off the dealer and start paying monthly payments to the new lender.
Benefits of Car Lease Refinancing
The biggest advantage of car lease refinancing is that it helps you build equity in your car. It also helps you avoid several additional fees like:
- Maintenance Fees
- Lease Cancellation Fees
- Wear and Tear Fees
Drawbacks of Refinancing a Car Lease
Since you will become the new owner of the car after refinancing, you are also supposed to bear all the post-purchase costs associated with owning a car after the buyout. Some disadvantages of car lease refinancing include:
- Termination fees to the dealer, which can cost between $300-500
- Sales Tax and transfer costs can cost up to $1000
- High refinance APR if you do not have a good enough credit score
Can You Refinance a Leased Car with Bad Credit?
According to the Consumer Financial Protection Bureau (CFPB), a score below 600 is typically considered poor. However, that doesn’t disqualify you from refinancing a leased car – but it does make it harder.
Ideally, the best option is to use an auto refinance aggregator like Way.com that can help you shop around for good deals. By inputting your preferred refinance rate and loan term, you can easily find lenders that specialize in bad credit and who will be willing to lend to you. Some lenders allow pre-approval through a soft credit inquiry, which will not hurt your credit score.
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