Refinancing a lease is difficult. There are some companies that offer lease refinancing, but you may have trouble finding one that can offer you a better deal than what you’re currently paying. Here’s why you typically can’t refinance a lease and your options if you can’t afford your monthly payments anymore.
Depreciation Means You Have No Equity in the Car
When you buy a car with an auto loan, you’re financing the value of the car. When you lease a car, you’re financing the amount it’s expected to depreciate over the period you lease it. This results in lower monthly payments when you lease than when you buy, because you’re financing a smaller amount.
Let’s say you lease a $25,000 car, and it’s expected to depreciate $9,000 over your three-year lease agreement. Your monthly payments go towards that $9,000, and since you’re paying for 36 months, you’ll pay around $250 per month, although fees could result in a slightly higher amount.
The problem is that cars lose the most value when they go from new to used, which occurs the moment you drive one off the lot. Your leased car could be worth only $22,000 at that point, but you’ve only made one payment of $250. It will take a year before you’ve even paid that initial $3,000 drop in value, and the car will have depreciated even more at that point.
Leasing companies aren’t likely to refinance your lease when you’re in the negative. It’s possible your lease payments won’t equal the amount the car has depreciated until the last few months of your lease. If the car holds its value better than expected, you may have better luck asking about refinancing.
So, refinancing with your leasing company often won’t be an option. There are a few alternatives available, each with their advantages and disadvantages.
Transferring Your Lease
There are lease transfer marketplaces available online where drivers with lease agreements can transfer those leases to people looking for a lease. The person who takes on the lease avoids the upfront costs, while the original driver can get out of his lease.
This is one of the best ways to get out of a lease because you avoid hefty early termination and depreciation fees. You won’t have a car anymore, but you can find another lease or an auto loan with monthly payments that better fit your budget.
You’ll need to check with your leasing company to ensure that they allow you to transfer your lease. Make sure you also won’t be responsible for the car at all once it’s transferred, as you don’t want to end up on the hook for any damage or mile overage charges that the new driver puts on the car.
Terminating Your Lease
Ending a lease is an expensive option. The leasing company will charge you an early termination fee and a depreciation fee. The latter is often thousands of dollars, and you could end up paying just as much in fees as you would have over the rest of the lease. Terminating your lease should be your last resort, because it’s never the best move from a financial perspective.
Purchasing the Car
Another option is getting a loan to buy the car. This allows you to keep driving the car and eventually own it, while getting new payment terms and possibly lowering your monthly payments. The leasing company will still charge you an early termination fee if you do this before the end of your lease. You’re better off if you purchase the car near the end of the lease instead of the beginning, but this can also work in the early stages of a lease if you’re in a bind financially.
Preparation Beats Refinancing
Of the options available, a lease transfer is typically your best choice. Buying the car could work out well, and depending on your situation, you may even have the option of refinancing your lease through a third-party lender. Avoid ending your lease agreement early whenever possible due to the high costs involved.
Ideally, you should only sign a lease agreement with monthly payments that you can easily afford, even if you go through a financial hardship. It’s not easy to modify leases, which is why it’s a bad idea to take on a lease that you can just barely pay every month. Driving a nicer car isn’t worth the hassle of trying to arrange a transfer or finding a way to refinance a lease.