When Can You Refinance a Lease?

If you want to lower your monthly auto loan payment, refinancing can be a good solution. However, if you lease a vehicle, refinancing isn’t usually an option. Lease terms are locked in at the moment you sign the contract, and unfortunately, there’s nothing in a standard lease agreement that allows you to swap one lease for another.

But that doesn’t mean you’re locked into your lease for the entire contract period. For example, if your lease payment is higher than you’re comfortable with, you have the option to purchase the vehicle and refinance it with a traditional auto loan. If you’re thinking about refinancing your lease, here’s what you need to know.

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When Is a Car Lease Refinance Worth It?

Technically, there’s no way to refinance a car lease in the middle of the contract. You can’t swap one lease agreement for another. The only way to refinance your lease is to purchase the leased vehicle and use an auto loan to pay it off.

If you take this option, you might have the opportunity to get an auto loan with a lower monthly payment than you were paying before. However, there’s no way to refinance your lease during the contract without buying it.

Depending on you situation, buying out your lease and refinancing can be a good option. Here are some reasons to consider refinancing your lease:

The Market Is Hot

If the buyout price of your leased vehicle is lower than the current market value, refinancing could put you in a favorable equity situation. You could buy the vehicle with a new loan and keep it or sell it for a profit.

You Want Smaller Monthly Payments

When you refinance your lease with a longer-term loan, your payments will be smaller because they’re stretched out over a longer period. However, you will pay more in interest if you choose a long-term refinancing loan.

Your Credit Score Went Up

If your credit score was in poor shape when you signed your lease agreement, refinancing can work out in your factor. When you buy your leased vehicle and refinance the loan, you might be able to qualify for a better interest rate, which can help you save money.

You Have to Pay Penalty Fees

You might want to consider refinancing your lease if you’re facing penalty fees for damage or excess mileage. Buying the car and refinancing the loan will help you avoid these charges.

When Is It a Bad Idea to Refinance?

Refinancing a lease isn’t the best idea for everyone. Here are some reasons to avoid refinancing:

The Buyout Price Exceeds the Market Value

If your leased vehicle’s buyout price is higher than its market value, you shouldn’t refinance. You don’t want to pay more than you would if you purchased the same make and model off the dealership’s lot. In this case, it will be cheaper to buy or lease another car.

You Don’t Like the Car

Many people choose to lease a car solely for the benefit of returning it in a couple of years and getting a new one. However, if you don’t like the vehicle and don’t want to keep it for much longer, refinancing probably isn’t the best strategy for you.

You Can’t Afford the Maintenance

Another advantage of a lease is that the factory warranty protects the vehicle for the entire contract period. You don’t usually have to pay for routine maintenance and repairs during that time.

But if you purchase your vehicle and refinance it, you may no longer have access to the warranty. And if you can’t afford the cost of maintenance, purchasing the vehicle isn’t the best financial decision.

How to Refinance an Auto Lease

When you refinance a lease, you purchase your leased vehicle and refinance with a new auto loan. Once you buy your car, you’ll own the vehicle alongside any lien holders.

You won’t be bound by strict lease terms, such as mileage limits, but you will be responsible for making monthly payments and paying for maintenance. If you want to refinance your lease, here are the steps you will need to follow:

Review the Terms of Your Lease Agreement

If your lease agreement is months or even years from its expiration date, review your contract to see if the leaseholder provides any options for early termination.

Ending your lease before the expiration date could cost you, as some companies charge fees to discourage lessees from refinancing and taking their business elsewhere.

Get Your Payoff Information

The next step is to figure out how much you’ll have to pay to buy out the car. This figure will likely be the residual value plus other costs, such as lease termination charges, transfer fees, and sales tax.

Get Preapproved for a Loan

You’ll want to get an estimated refinance payment so you can make sure it fits your budget. You can start with an online calculator to get a rough idea of your potential monthly cost. You should also shop around to see which lenders can offer you the best loan terms.

Put each company’s rates and terms side-by-side to find the best deal. Then, submit your application and get a pre-approval letter. Most lenders won’t have to run a hard credit check for a pre-qualification, so it won’t affect your credit.

Buy the Car

Once you’ve narrowed down your options to refinance your lease, choose the best loan, finalize the paperwork, and provide any supporting documents to get approved. Once you receive the funds, you can buy out your lease with the dealership.

Your lease contract will end and you will become responsible for making your monthly auto loan payments.

Benefits of Car Lease Refinancing

Refinancing your lease makes sense in some situations. Here are a few good reasons to refinance your car lease:

You can sell the car. Once you buy your leased vehicle, you’re free to sell it. You could even make a profit, depending on market demand and the condition of your vehicle.You can extend the term. If your lease payments are too high for your budget, securing a loan with a longer term could make your monthly payments more affordable by spreading them out over a longer period.You can reduce the interest charges. Refinancing your lease can help you get a lower interest rate, which could save you a lot of money in interest over the life of your new loan.

Drawbacks of Refinancing a Car Lease

There are some disadvantages to refinancing a car lease. When you purchase the leased vehicle, you become responsible for all buyout-related costs.

These charges, which may include termination fees and sales taxes, can add up quickly. When you refinance the loan, you could also get stuck paying a higher interest rate if you have a low credit score.

Can You Refinance a Leased Car with Bad Credit?

If you have a poor credit score, it can be more difficult to refinance your lease. Not only can having bad credit make it harder to qualify for an auto loan, but you might also pay a higher interest rate or a higher monthly payment.

This defeats the purpose of refinancing your lease. If you have a subprime credit rating, it’s important to shop around for the best deal. Many auto lenders specialize in working with customers who don’t have a good score, so don’t be discouraged if you want to refinance but don’t have perfect credit.

Other Options to Get Out of Your Lease

If buying your leased vehicle isn’t an option, there are several other ways to get out of your lease agreement. However, it depends on your lease contract and what your lender allows.

For example, if you can’t afford your payments, you might be able to bring the vehicle back to the dealership. Some lease agreements allow you to do this before the expiration date, but you’ll have to pay early termination fees.

You might also be able to transfer your lease to another person. Unfortunately, not all contracts include a transfer option, and if yours does, it will probably come with a fee.

However, if you find someone who wants to take over your payments, it’s worth considering this option. There are even websites that match people looking to take over vehicle leases with people who want to transfer their leases.

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.