You may be considering raising cash in the short-term with an automobile title loan. If you do the research and run the numbers behind these deals then you may not like what you see.
Here is an alternative strategy to get cash in your hands in the short term and, possibly, end up with a better overall deal on your car than when you started:
- Converting your automobile retail purchase to a pre owned Lease.
- As the applicant you must have at least a 560 credit score with no charged off or repossessed vehicles on any of the Bureau reports
- You must have a currently open and current car note or show a paid auto loan on any bureau
- A current mortgage or paid off mortgage is always a plus to help your cause to prove that you are creditworthy
The Main Ideas
The idea is to have your current auto loan paid off, get a check for the amount of money that you need then turn around and lease that same vehicle. This will boost your credit by showing a paid off vehicle on your bureau and allows you to stay in your car at a lower payment while you retire negative equity.
You must be wondering about the check for that money that you need. Where does it come from? How do I pay it back?
How It Works
Here is how it works. A Lease is a depreciation transaction. So you are only paying for the depreciation of your vehicle rather than investing in an asset that loses money everyday.
Say you have a car with an MSRP (Manufacturer’s Suggested retail Price) of $40,000. If you finance it, you finance $40,000 at whatever rate over however many months. If you lease it for say 60 months, then you are financing $40,000 minus the residual value of that vehicle.
Residual value is the guaranteed value of the vehicle at the end of the lease provided you stay within the agreed upon mileage and the car is in good condition. So if the MSRP of the vehicle is $40 000 and the residual value after 60 months is $20 000, you are essentially financing only $20 000 therefore lowering your monthly payment considerably.
As a result, even with negative equity and the amount of the check for the money you need rolled in to your lease payment, it will come out lower than that of your finance payment. If you have equity in you vehicle, there is no negative equity to worry about and you can cash in that equity and then some and not worry about outrageous loan payments or terms as it is part of your lower monthly car note.
Worries About A Lease
Now I know some of you are worried about a lease. What happens at the end of the lease term? Can I keep the car? What about mileage, I don’t want to worry about mileage? Let’s start with some of the leasing concerns.
Many people wonder why not just do a regular refinance. This is a legitimate option, particularly if your interest rate is going down. The down side however is it creates even more negative equity that gets progressively worse particularly if a money back check is part of the deal.
Inversely with leasing, it is a mechanism to retire that negative equity so that you cut into it the more payments you make. There is no mileage check or penalty if you decide to trade out of it before term and there is no odometer check unless you take the vehicle to term.
At that point if you are over the mileage you have the ability to trade out of it, finance the balance or hand in the keys and walk away if you are within the mileage or pay the mileage penalty. If you are below that mileage, you get a check back for unused mileage, depending on the program.
Some automobile lease banks have what is called “conservative residual values.” These are designed to put you in a positive equity situation at end of term to broaden your options.
Another big advantage is the ability to write off depreciation for your business where you cannot with a regular purchase. Depreciation can amount to tens of thousands of dollars a year depending on the vehicle and will help your businesses bottom line.
In short, there is a new way to extract money out of your vehicle without jolting your debt to income ratio or outing yourself on the hook for another payment. Yes it does require an adjustment on how many of us view auto financing.
It, however, gives those of us with less that perfect credit the opportunity to get some much needed cash flow without subjecting yourself to bankers and/or ridiculously high interest rate loans that could potentially make cash flow problems worse.
To determine if your situation qualifies for this alternative strategy, you are welcome to contact us here.