Refinancing a Leased Car – What’s the Point?

Have you ever leased a car knowing perfectly well you’re being ripped off? A month later, your colleague got the same one from a different leasing company and a few options less but they’re paying 10% less on the same lease term.

How about getting a sporty car with a lot of power, but realizing it’s too heavy and ploughs through corners, barely managing to stay in lane at high speed? It’s nowhere near the handling and performance you expected, but you’ve got 18 months of the lease still.

There are probably a million ways you can get stuck in an unfavorable lease deal. 

• Maybe you didn’t have an opportunity to shop around. You got a crap car or poor lease terms and now suffer the consequences.
• Maybe your financial situation has changed and you need to shake some money off your monthly payment ASAP.
• Or maybe, you just leased more car than you could realistically afford and you’re looking for a way out

We’re not judging and the leasing company doesn’t really care. Whatever hardship you’re going through is on you. Once you’ve signed the lease, you have a contractual obligation to pay your monthly lease payment on the appointed date every single month until your lease expires. 

You can’t change the payment amount or the lease term or the mileage allowance – basically anything that influences the value of the vehicle or the profit the leasing company gets in the deal.

Look, if your case is really appealing, perhaps you can call your leasing company and arrange to defer a few payments until you get back on your feet. But those will get added back at some point. There is no way anyone can reduce the total cost of their lease. 

What can you do if you want to get out of your lease?

We’re not trying to paint a bad picture on leasing companies. They’re not out to get you personally. They’re only after the money you agreed to pay when you signed the contract. The moment you secure the funds, whichever way you can, the leasing company will let you off the hook. 

So here are your options to terminate a lease early:

• Lease transfer – If your contract allows it, you can find another person to take over your lease. They will get the car and make payments for the remainder of the contract. You get to go completely free…well…most of the time.
• Lease pull ahead – If you have a few months left on your lease, you may be able to negotiate a new lease with the same company and get a new car early.
• Pay a lease termination fee – This is the worst imaginable option. Basically you’re giving the car back and paying an eye-watering amount of money which is roughly equal to the value of your remaining monthly payments.
• Buyout and resell – The majority of leasing contracts allow you to buy your leased vehicle at any point in time for a sum which is calculated for you on demand. After transferring the buyout amount, you become the owner of the vehicle with no strings attached.

You can read all about your end of lease options in our dedicated article – How To Return A Car At The End Of A Lease (Complete Guide)

Buying your leased car

So, assuming you have the possibility of buying your leased car, it can be a great opportunity to terminate your lease in favor of a more suitable deal. 

The process of buying your vehicle is pretty straightforward. You simply call the leasing company and ask for the “buyout price” or “payoff amount”. They’ll either give you a number right there and then or call you back with a price. 

You can also estimate the buyout amount fairly accurately yourself. At the end of your lease term, the buyout price is exactly equal to the residual value of the vehicle as agreed in the contract. If you want to buy your leased car sooner, you need to add all remaining monthly payments to the residual value. The leasing company may use some correction formula, so you should always call to verify the exact price.

Buying the car will bypass all end of lease procedures. You get the car as is, but you don’t have to go through a final inspection or pay any fees like termination, excess mileage or wear and tear. Depending on your situation, these fees can amount to thousands of dollars. You should use your leasing company’s self-assessment guide to figure out if these fees apply to you and account for them when doing the numbers.

Keep in mind that the buyout price is dynamic and usually changes day to day, so you may need to call several times and get an updated number. 

You usually don’t have much of a leverage to negotiate the buyout price, but you can always try. Remember that as far as they’re concerned, you’re paying cash. So, negotiate like you’ve got a bag of money with their name on it.

But…how do you get the money?

If you had piles of cash lying around, you probably wouldn’t be in such a position to begin with. If you can’t get the money or don’t want to tap into your savings, refinancing is a great option.

Refinancing a leased car

You’re probably heard about refinancing traditional auto loans. Basically, you take a second loan to payout the first one. Then, you simply continue paying off the second loan which supposedly has better terms for your situation.

You can do a similar scheme with your lease. Once you know what your buyout amount is, you can find a lender who will extend the same amount to you, using the car as a collateral. 

Then, you simply buyout your lease and continue forward, paying monthly installments to your new lender under the new terms you agreed. 

Why refinance your leased car?

All of this refinancing business sounds sketchy and convoluted. However, there’s a few real good reasons why you want to refinance a leased vehicle.

1. Ditch the car and lease. Once you’ve received the title to your car, you can sell it to another dealership or a private individual and pay off the loan. This way, you’ve escaped the lease, got rid of the car and hopefully come out dry.
2. Extend the term. If your lease payments are too big for your budget, but you like the car and it’s good value for its price, a new auto loan will allow you to reduce your monthly payment by spreading the cost over a longer period. This will likely increase the total cost of the vehicle, but it will allow you to keep it.
3. Reduce the interest charge. Because of the extra labor and risk associated with extending auto leases, they typically come with higher interest rates, compared to auto loans.
   Add to that the vague way leasing companies commonly use Money Factor instead of APR. Money Factor is a lot more convoluted and difficult for the customer to follow and gives dealerships the opportunity to mark up the interest without you realizing. And finally, you may have just been out of luck, needing to take up a new lease with temporarily reduced credit score.
   All these factors and more can result in the leasing company profiting a lot more off your back than you’d like. The right auto loan can refinance your lease with a much smaller interest rate, which can reduce both your monthly payment and the total cost of the vehicle.Of course, getting a good loan offer depends on the same factors as getting a good lease – credit rating, stable income, proof of identity and address.
4. Earn a quick profit. Banks are typically very good at calculating the residual value for your leased vehicle. However, the market is not perfectly predictable and many times you can see cars depreciating at a different rate. By comparing your buyout amount to real time prices, you can gouge whether you’re getting a good deal out of your lease.
   If cars sell for considerably less than your buyout amount, then you’re paying too much money on your lease – one way or the other.
   If the same car sells for more than your buyout amount, you’re in a good position. You can purchase your vehicle off the leasing company and sell to the market, making a small profit. You can’t really make a tone of money doing this, but any margin can easily offset some of the costs and fees associated with the lease.

Why avoid refinancing a leased car?

Of course, there are some drawbacks to refinancing your leased car. 

1. It’s a hassle. In order to get good value of refinancing your lease, you need to spend considerable time in research. You have to obtain different quotes from finance companies, compare them to the total cost of your lease and the buyout amount, as well as the market value of the vehicle. Only when all the numbers indicate there are gains and opportunities, should you refinance your lease. 
2. Lower interest is not guaranteed. Keep in mind that many finance companies consider leased vehicles as second hand stock, even if they never left your possession or you’ve only had them for several months. Loans for second hand cars typically come with higher interest rates.
   Furthermore, if the buyout amount is higher than the market value, you’re upside down on the lease. You’re asking the bank to pay more money than the asset is worth, so they may impose higher interest charges to offset the risk.
3. You need to pay a lot more than you planned. When you first set up the lease, you probably never intended to pay full price for the vehicle. If you’re refinancing out of necessity, it may be daunting to incur an even bigger debt for a car you never planned on owning.
   Refinancing the vehicle may result in a substantially higher monthly payment.If the market is not favorable, you may need to keep the car for a while before you can sell it for a reasonable amount.
   If you’re in this situation, you should carefully research the market rate at which you can sell the vehicle and plan how you’re going to pay the new loan, before taking it on.
4. Taxes and fees. One of the clear advantages of leasing a car is you don’t have to pay sales tax on the full price in most states. When you buy it out from the leasing company, you need to pay sales tax on the payoff amount.
   Add to that any potential fees the leasing company and the lender may apply and you can be looking at thousands of extra dollars to facilitate the transaction. You should definitely double check all fees with both parties and tally up the final expense.

Whether refinancing your leased vehicle is worth it depends on a plethora of factors which vary in every individual case. You need to do the numbers. So, let’s do them together. 

Refinancing a leased 2020 Mercedes-Benz CLA Coupe

Okay, let’s run through a practical example. 

Let’s assume you’re leasing this nice 2020 Mercedes-Benz CLA Coupe. It’s a really cool subcompact sedan. It says coupe on the name, but it has four doors and a trunk, so it’s a sedan, regardless of what Mercedes is trying to shove in your face.

Anyway, you’ve got a pretty powerful 2.0-liter turbocharged four-banger with 221 horsepower, which is plenty for moving this relatively small car with ease. It gets 25/32 MPG combined, so it’s pretty efficient too. Don’t be startled by the front-wheel-drive layout, the car negotiates turns far better than you’d expect. 

Yet, the real selling point is not performance, but technology. The CLA Coupe is absolutely packed with features, including the proprietary Mercedes-Benz User Experience (MBUX). It’s got artificial intelligence, voice commands, heads up displays in full color and many mind-blowing features we’re only used to seeing on CSI (and those were all fake).

So, here are the lease parameters:

• It’s a brand new 2020 model
• The lease payment is $435 per month 
• There is a down payment of $2,500
• The lease extends for 3 years at 10,000 miles per year

Looking up the values on the Edmunds forums, we get a Money Factor of 0.00088 and a residual value of 58% for a comparable lease configuration.

When we plug all of this information into a lease calculator, we get a monthly payment of $450.33. That’s great news! Whatever money factor and residual value is used for our lease offer, it’s better than the average one given by Mercedes-Benz.

Look at the screenshot below, or go to https://www.calculator.net/auto-lease-calculator.html and plug in your own values.

Let’s then assume you’re 14 months into the lease. You’ve put $8,590 into the car already and you’re not happy. You want to get out of your 2020 Mercedes-Benz CLA Coupe lease.

The buyout price will be the residual value plus the remaining monthly payments. Putting that into numbers we get $21,834 + 22 * $435 = $31,404. We’ll ignore other fees for this example. 

In order to refinance the CLA, you need to obtain $31,404 from your new lender at a maximum of 2% interest to keep in line with your lease deal. This may actually be difficult to achieve without a great credit score, but entertain the thought. Let’s say you get the loan for 48 months. 

The total interest on the new loan is $1,299, making the total cost of the loan $32,703 with a monthly payment of $681. 

What? That’s a 56% increase on the monthly payment! What have we done?!

Don’t panic! Remember, the whole point is to get out of the vehicle. This means you have to sell it on the market and pay off the auto loan. Looking at CarGurus, you can see multiple used CLA Coupes FWD going for $35,000 and more. 

So, you’re in a good spot really. If you add all the extra fees and taxes we ignored, they’ll eat most of the profit. However, the goal is complete. You got rid of the car without paying thousands in losses. You’re now free and can get any other car you want…or can afford.

Was all this refinancing hassle worth it? In this case, absolutely!