Leasing a new car gets you into a vehicle with up-to-date features and technology for a reasonable monthly price. When you need to get out of a lease early, it can become an anchor with the potential to sink your financial future. A car lease is a long-term contract with payments and fees that are based on the assumption that you will fulfill all of your monthly obligations. Fail to do so, and the agreement is filled with legal ways for the lessor to get the money they expected.
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With few exceptions, getting out of a car lease early will cost you money. How much money it will cost, and how badly it will affect your credit standing depends on how you terminate the lease. Here are some of the common options for how to get out of a car lease:
- Defaulting on a Car Lease
- Early Termination
- Consider a Lease Buyout and Sale
- Leasing a New Car
- Lease Swaps
- Find a Way to Keep Making Your Payments
Why Is a Car Lease Hard to Get Out Of?
To understand why a lease agreement is difficult to end early, you need first to understand how a car lease works. When you buy a new car, you’re responsible for paying the entire cost of the vehicle. When you lease a car, you only have to pay for the depreciation that is expected to occur during the time that you have the car, plus any fees, taxes, and interest. Some car leases require a security deposit to cover any potential costs at the end of the lease.
To figure out the amount you have to pay, take the price of the car – also known as its capitalized costs (or cap cost) – and subtract the expected value of the vehicle at the end of the lease term, which is called the residual value. That difference is divided between an amount due at signing and a series of equal monthly payments, which include interest.
Leasing companies base the deal they make with lessees on the assumption that all payments will be made and the vehicle will be returned to the right place at the right time. If you return the car early, they won’t get the rest of their payments. Since the car is no longer new, they can’t just lease it out again.
Because they won’t get all of their money if you terminate the agreement early, the lease company builds into the contract a costly penalty for early termination. How much that penalty is depends on your contract. Some have fixed early termination fees while others have charges based on the number of lease payments you have left and the vehicle’s current value.
If you own a car and you get into financial trouble, you can just sell it, pay off the loan balance, and be done with it. It’s not that simple with leasing.
What if I Had a Financial Hardship?
Many early lease terminations are triggered by a short-term change in personal circumstances such as the loss of a job, divorce, health issue, or other financial calamities. In the eyes of the lease company, you are still required to pay what you agreed to. You should not expect any relief from the legally enforceable contract that you committed to. Though some leasing companies will suspend your payments for a few months if you have a financial hardship, those payments are merely deferred, and you’ll have to pay them eventually, with interest.
One exception to that rule is if you are a member of the military. In some cases, a deployment or a permanent change of station will qualify you to get out of a car lease early with little cost and few penalties. Military members are protected by the Servicemembers Civil Relief Act, which releases them from certain financial commitments under specific circumstances. If you feel you are not being treated fairly under the statute, you should seek legal advice before an unscrupulous leasing company damages your credit.
Leasing and Your Credit
To get a lease in the first place, you need to have good credit and a stable employment history. Terminate the car lease the wrong way, and your high credit score will drop, making it hard to get another lease and more expensive to get a car loan if you need one to replace your leased wheels.
Though it’s the worst possible scenario, a bad lease termination can even lead to bankruptcy if you are unable to pay the termination costs and payments.
The worst possible way to end a car lease early is to stop making on-time payments and default on the lease. Doing so triggers a multitude of actions by the leasing company, and they're all terrible. First, the leasing company will have the ability to trash your credit by reporting your account as in default.
They will also have the legal right to repossess the vehicle and add the cost of repossession to the amount they can charge you (in most states).
Finally, they can charge you any early termination fees stipulated in the lease contract, plus the remaining lease payments. If you don't pay, they can sue you and attempt to collect the remaining debt. Failure to pay any judgments against you sinks your credit score even lower.
Given that leasing is reserved for customers with top-notch credit, a car lease default will likely disqualify you from getting another lease for the better part of a decade. A lease default should always be your last resort, and you should exhaust all other possible options to get out of your car lease before the situation gets so bad that you don’t have any other options.
On the scale of ways to end a lease agreement before the term is up, an early termination is much less damaging to your credit than a default. By carefully reading the termination clause in the lease agreement, you can find out how to avoid harming your credit.
Depending on the terms of the contract, you’ll likely be responsible for hundreds of dollars in early termination fees plus potentially thousands more to satisfy any payments still owed on the lease. If you put too many miles on the car or there is damage or excessive wear and tear, you’ll be responsible for those costs as well. If you paid a security deposit at lease signing, it will be applied to the amount of money you owe to the leasing company. Paying all of the car lease termination fees is a tough hurdle, especially if financial hardship is the reason you need to get out of the car lease early.
It is important to remember that while you initiated the lease agreement at a car dealership, your contract is with a leasing company. When you’re working out a lease termination deal, you should be talking directly with the lease company, rather than the dealership, which doesn’t have any responsibility or incentive to help you out.
The next best way to get out of a lease takes excellent timing and quite a lot of work on your part, but it can save you a lot of money and protect your credit. Most every lease has a buyout amount that decreases as you make payments. You’ll need to call your leasing company – again, not your dealer – to find out the payoff amount. Ask to make sure that the price you are quoted is the out-the-door price, including the termination fee and any other costs, plus any credits from your security deposit. While you’re talking to them, be sure to ask whether there are any restrictions in your lease contract about selling the car, and verify their answer by reading your lease paperwork.
You’ll then need to sell the car for at or near the payoff amount, pay off the leasing company, and get the title to present to the car’s new owner. That’s the tricky timing part. You need to get money from the buyer well before you’re going to be able to give them the title to the vehicle, and potential buyers may not want to wait.
Still, you need to get the best price possible on the sale of the vehicle, so selling it yourself to another private party is probably the best route to go. Selling it to another dealership will only get you wholesale value, rather than retail market value, which is likely well below your buyout cost. Our article on how to sell your car can help you through the process of preparing, selling, and documenting the sale of your existing leased car.
Although you won’t get the most for your vehicle by going through a dealer, you might find that it’s less stressful, as they’ll take care of all of the paperwork and payoff transactions.
Sometimes the reason you want to get out of your current lease early has nothing to do with your financial situation. You simply want a new car. Maybe kids have arrived, you’ve moved to an area where an all-wheel-drive SUV is a necessity, or that two-seat convertible just doesn’t cut it anymore.
Regardless of the reason you want new wheels, going to the same dealer where you got your current lease to get a new lease can save you some money. Leasing or buying a new car from the same dealer earns you some goodwill, and the dealership may reduce or waive some fees and penalties on your trade-in in exchange for your repeat business.
There’s a big catch to doing this, though. While some fees may be waived, you’ll still be responsible for any lease balance above the buyout value of your current car. They’ll just roll that balance into the capitalized cost of your new lease, and you’ll essentially be making payments on both cars. Sound like a good financial move? You’re right, it’s a horrible thing to do unless you have just a couple of months left on your lease contract.
Here's an example to illustrate how a purchase and rollover might work: We'll say that your buyout cost on the lease is $25,000 but the car is only valued at $20,000. They'll take that $5,000 difference and add it to the new lease agreement, meaning that you’ll be paying for your new vehicle plus $5,000.
Whether you are a car buyer or a lease customer, it's never a good deal to move costs from your current vehicle to a new car. Doing so dramatically increases your chance of having negative equity on the loan or lease and being in deep financial trouble if the vehicle is totaled or stolen.
When you roll additional costs into any new-car transaction and you need to pay off an existing lease, you aren’t usually eligible for any manufacturer-subsidized lease deals. If you find an exceptional lease deal from an automaker, it might be worth taking out a personal loan or dipping into your savings to pay off the balance of your current lease so you can take advantage of the deal.
Lease assumptions and lease swaps are a way for you to transfer your leased vehicle and its cost to someone who is looking to lease a car. In the past, it was difficult for lessees to find people who wanted their vehicles. Thanks to the internet, lease transfers are now easier. Companies like SwapALease.com and LeaseTrader.com are like the Tinder of the leasing world, matching lessees to people who want their vehicles.
The way that the swap a lease services work is pretty simple. You pay a relatively low upfront fee to list your vehicle on their site. You then build an ad with plenty of photos, showing the features and condition of the vehicle, plus facts and figures such as its mileage. When someone comes along who wants your leased vehicle, you pay a larger fee to initiate the transfer and have SwapALease, LeaseTrader, or a similar company handle the paperwork for the transaction. Your lease company may also require you to pay a lease transfer fee.
Naturally, as with everything in leasing, swapping is not quite that simple. First, you’ll want to check with your leasing company or review your lease paperwork to find out if lease assumptions are allowed by your contract. Some contracts specifically forbid assumptions or swapping. If your mileage or lease payments are high compared to those found for similar vehicles on the lease-swapping sites, you may have to put a cash incentive into the deal to make it more attractive to potential customers.
Assuming everything is OK with your lease originator, the lease-swapping company completes the documents for the transfer and works with your leasing originator to make sure that all of the lease transfer provisions of your contract are adhered to. Depending on the lease swap company that you are using, you may have to complete any legally required DMV paperwork yourself.
With lease swapping, knowing how your leasing company requires the post-transfer paperwork to be written is critical. In some cases, they'll allow for a true assumption of the lease, where the original lessee is completely removed from the contract and is not liable for any further costs, even if the new lessee who assumed the agreement does not make their monthly payments or incurs hefty excess mileage charges.
In other cases, the leaseholder will keep both the original customer and the new customer on the lease documents. That’s risky if you’re the one trying to get rid of the lease early, as you’re legally considered a co-signer on the contract. If the person acquiring the lease does not make their payments, trashes the car, or puts excess mileage on it, you’ll be responsible for the financial consequences.
One way to avoid the hassle of terminating or defaulting on your car lease is to find a way to continue making timely monthly payments. If you are well-under your mileage limit, you could consider driving for a ride-hailing company such as Lyft or Uber to help your automobile pay for itself. Amazon.com allows you to make $18 to $25 per hour by delivering packages with your personal car through their Amazon Flex program. You’ll need to check with your leasing company to ensure that such use is allowed by your contract.
Another way to turn your car into a moneymaking machine is through a peer-to-peer car rental company such as Turo. It’s a bit risky, as it can quickly create wear and tear on your leased car, but it might make you enough money to keep your car lease payments up-to-date.
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Though leasing is simple in concept, it can be complicated and intimidating in practice. Before you lease your next car, read our articles on leasing versus buying, understanding how to lease a car, and avoiding costly leasing errors.
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