Refinancing your lease has a number of benefits. It can lower your monthly payments and reduce the amount of interest you have to pay. However, refinancing a lease also has downsides. For example, you might have to pay expensive fees for terminating your lease early.
Before you decide to refinance your lease, here are a few things you should know.
What Is Car Lease Refinancing?
When you refinance a car lease, you buy the vehicle outright and use an auto loan to finance the purchase. You can use the new loan to lower your monthly payments, extend your repayment period, or lock in a lower interest rate.
It’s important to know that refinancing a lease is different than refinancing an auto loan. When you refinance an auto loan, you swap one loan for another.
However, you aren’t allowed to swap one lease for another. The only way to refinance a lease is to buy out the vehicle and take out an auto loan, which will have different terms.
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How Does Refinancing a Car Lease Work?
Refinancing involves buying your leased vehicle and financing the purchase with an auto loan.
The first step is to find out the payoff amount from your lease company. This is the amount of money you have to pay to buy the car. It also includes taxes and fees.
Next, you will want to shop around for financing options to help you afford the buyout price. You can get pre-approved by several lenders to see which one can offer you the most favorable loan terms.
The final step is to take out a loan and use the funds to purchase your leased vehicle. Your lease contract will end and you will become responsible for making your new auto loan payments.
Benefits of Car Lease Refinancing
The main advantage of refinancing your car lease is to change your payments or interest rate. For example, if you refinance and choose a longer-term auto loan, it will reduce your monthly payments.
Or, if you’re able to qualify for a better interest rate, you won’t have to pay as much money in interest over the lifetime of your loan.
Car lease refinancing can also help you avoid fees. For instance, if you racked up fees for damage or excess mileage during your lease period, you won’t have to pay those fees if you decide to buy out the leased vehicle.
Drawbacks of Car Lease Refinancing
Refinancing an auto lease is not the right decision for everyone. It’s important to consider the drawbacks if you’re thinking about refinancing.
When you refinance, you are responsible for paying purchase fees, including sales tax and transfer costs from a lease buyout. Some leasing companies might also charge a termination fee, depending on when you buy out your leased vehicle.
If your credit score needs work, you might get stuck with a higher interest rate on your auto refinance loan. If you end up paying more each month to own your leased vehicle, refinancing won’t provide any benefit.
How to Refinance a Car Lease: A Step-By-Step Walkthrough
Follow these steps to refinance your car lease:
1. Read Your Lease Agreement
The first step to refinancing your lease is to read your lease agreement. Not every lessor lets you purchase the car you’re leasing. If a lease buyout option is available, review the contract’s fine print to find out if the buyout process has additional fees.
2. Get Your Payoff Amount
Next, you need to figure out the lease payoff amount, which is based on the car’s residual value. The residual value is the car’s estimated value at the end of the lease, which is predetermined when you first signed your lease contract.
There might also be extra charges depending on when you buy your leased car. For example, if you do an early lease buyout, you might have to pay a contract termination fee.
But if you choose the lease-end buyout, you might only be responsible for paying the buyout price and sales tax. Contact your leasing company to confirm the expected payoff amount.
3. Estimate Your Car Lease Refinance Payments
Once you know the payoff amount, it’s time to estimate your new monthly payments. The idea behind refinancing is to save money, so you want to make sure you’ll get a better rate with a new loan. Use an auto loan calculator to get an idea of your future monthly payments.
4. Shop for the Best Rate and Apply for an Auto Refinance Loan
The next step is to compare loan rates from different financial institutions. You can get pre-approved for loans from a few different companies to see which one can offer you the most favorable loan terms. Then, choose the best lender and apply for a loan.
5. Buy Your Leased Vehicle
The final step is to use the money from your auto loan to purchase your leased vehicle. At that point, your lease contract will end and you will start paying off your auto loan.
Other Options Besides Refinancing
There are several other ways to get out of an auto loan if you don’t want to refinance.
One option is to buy out the car in cash if you can afford it. Once you own the vehicle, you can sell the car if you change your mind and decide you don’t want to own it anymore. Selling the car can also be a good option if the market value is higher than the buyout price of the car.
Starting a new car lease might also be a possibility. If you’re near the end of your lease, some leasing companies might let you end your current lease a few months early if you transfer to a new one. This might be your best option if you don’t mind leasing another car.
Frequently Asked Questions
Here are some FAQs about refinancing a car lease that can help you decide if it’s the right choice for you.
When Should You Refinance a Car Lease?
There are a few good reasons to refinance a car lease. For example, if you have excellent credit, refinancing could reduce your interest rate or lower your monthly payments. If the car’s resale value is higher than the buyout price, you could buy the car and sell it to make a profit.
Or, maybe you love your car and don’t want to part with it when the lease ends. You can avoid the hassle of starting a new lease by buying out your current one.
How Soon Can You Refinance a Car Lease?
As long as there aren’t any restrictions for a lease buyout in your contract, you can refinance your car lease at any time.
However, keep in mind that an early lease buyout might have a penalty fee. You should double-check your lease agreement to understand the refinancing conditions before you choose this option.
Can You Refinance a Leased Car with Bad Credit?
Having a poor credit score doesn’t restrict you from refinancing a leased car. However, it can make it more challenging.
You might get stuck with a higher monthly payment or a higher interest rate than you’re currently paying. Shopping around at different financial institutions can help you find the best loan offers available.
Does Refinancing Hurt Your Credit?
When you apply for a refinancing auto loan, it can hurt your credit score. However, it’s only temporary.
The lender will run a hard credit check before you get approved, which will cause your score to drop slightly. Once the inquiry is removed from your credit report, your score should rebound.
Is Refinancing Your Car Lease Worth It?
Refinancing a leased car can help you save money, but it depends on the loan period, interest rates, and your credit score.
For most people, refinancing leads to lower payments and lower interest rates, but the opposite can also happen. Before you decide to refinance, it’s important to weigh the pros and cons based on your unique situation.
Finance & Insurance Editor
Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.
