How to Get Out of a Vehicle Lease
It is not impossible to break a car lease, but it is not always easy. The more payments you make, the more profit the leasing company makes. Because profit drops substantially with each unpaid payment, lease contracts are full of early termination fees and penalties.
Deciding to terminate your lease
Although there are multiple reasons for terminating a lease, most boil down to a change in lifestyle or finances. Here are the most common reasons people decide on early termination.
Growing families may need to trade their sports car for a roomier sedan to accommodate car seats. Alternatively, maybe your family is grown, and you want to trade your minivan for something fun and fast.
A new job can often mean a change in location or your daily commute. The extra travel can result in penalties for excess mileage, or you may prefer using public transportation in your new urban area.
A fuel-efficient vehicle can help you save cash in a financial crunch. On the other hand, a work raise could have you eying the model you wanted, but could not afford until now.
Sometimes it takes driving a vehicle for a while before you realize it is not a good fit for you. In this case, finding a different model with the features you need can be attractive.
Types of termination penalties
Breaking your car lease may leave you on the hook for one or more of the following costs.
- Remaining monthly lease payments
- Early termination fees
- Cleaning or other pre-sale preparation costs
- Vehicle storage or transportation
- Unpaid taxes associated with your lease
You may also have to pay negative equity between the car’s value and the amount of the lease. For example, assume you leased a $50,000 vehicle. Mileage and regular use have depreciated it, and its current worth is now $45,000. You may have to pay the $5,000 difference between the leased value and the present value.
Most leasing companies do not impose all these penalties. The most common ones are remaining monthly lease payments and early termination fees.
Avoiding early termination penalties
Often people are under the impression that you cannot break a lease agreement. That is not entirely accurate. However, since lease contracts are legally binding, they are harder to get out of than a car loan. It is possible, but it could cost you.
You may not be able to avoid early termination penalties fully, but you can minimize them. Here is what you need to know.
Ideally, you read through your paperwork carefully before signing. In practice, many of us click “I Accept” and move on without checking the fine print. Review your lease to determine what options are available. Some companies will not allow lease swaps. Others may penalize you heavily for returning the vehicle. Ask an Expert if you need help translating legal terms to simple terms.
Some leasing companies make you pay all outstanding lease payments as a requirement for early termination. Others base the number of payments you must pay on how long you have had the lease. They charge more for breaking the lease at the beginning of the contract, and less the longer you have kept the contract. Knowing how much you must pay in certain situations will help you determine your best options.
You need to know your available cash flow before breaking your lease. Determining what you can afford will help you avoid winding up in the same predicament in another year or two.
Ending your lease
There are several options for terminating your lease early. You will need to weigh the factors in each scenario to determine which choice is right for you. Talk to a Legal Expert if you require help examining these options.
Returning the vehicle to the car dealer
This is the simplest option, but it can be the most expensive one as well. The dealership will handle the details for you. They will accept the return, clean it up, and auction it off at wholesale prices. This “realized value” is subtracted from the amount you owe.
At a minimum, you must pay the remaining lease payments and any early termination fees. You may also be charged for the vehicle’s pre-sale cleaning and transportation to the new owner. Finally, the auction price of the car is often far below what it is worth. Since you must make up the remaining difference, returning the car to the dealer can cost you thousands more in the long run.
Trading the car for a new lease
If you are strapped for cash and need to trade vehicles, this might be a logical alternative. Typically, the car dealer does not require upfront cash for a trade-in. Instead, remaining payments and termination penalties are rolled into the cost of your new vehicle.
However, it is important to consider your budget. Adding extra costs to the new lease agreement means higher monthly lease payments. If you cannot afford these payments, leasing a new car can leave you in the same predicament in a matter of months. The rollover amount can also leave you “upside down” on the new vehicle. “Upside down” is an industry term for owing more than the vehicle is worth.
Buying and reselling the vehicle
If you can sell the car for more than what you owe on it, this choice could earn you some money. Even if you will nearly break even, it is one of the less expensive options for breaking your lease. However, you will have to do some research. First, check Kelly Blue Book or Edmunds.com to get an estimate of your vehicle’s resale value. Next, you will need cash or financing to pay off the vehicle. Finally, make sure you have a buyer lined up.
If all goes well, you may end up with some profit. Note that in these cases, some states may levy taxes against your profit. An Expert can help you determine how tax laws in your state can affect your sale. Do not worry if you end up paying out a few hundred dollars. It is still much cheaper than paying early termination penalties. But be aware that a lease buy out has potential hidden costs too. You will likely still be responsible for excess wear and tear, the depreciation costs will be your responsibility, and your previous payments will mostly go toward finance charges (not equity).
Trading your lease
Some online companies facilitate lease swaps, matching potential buyers with people who need to break their lease. Both the lease swap company and the leasing company charge fees for the transfer, although the buyer typically pays most of that amount.
A successful pairing of buyer and seller can be a win-win proposition for both parties. The buyer gets a short-term lease without a hefty down payment, and the seller gets to break their lease without paying termination fees.
However, there are a few drawbacks. In about 20 percent of transactions, the original lessee retains partial liability for the remaining payments. In other words, you are co-signing a loan for the person who buys the lease from you. If they default, you are responsible for any remaining payments. A few financial institutions do not allow lease transfers, so check the terms of your lease contract before exploring this option.
Defaulting on your lease
This is the worst option for breaking a lease, and should only be used as a last resort. Defaulting means you simply quit paying your monthly lease payment. Because of the binding legal agreements in a lease contract, you can be sued or face collections actions or court judgments against you. Defaulting may also have significant negative effects on your credit.
If it seems like you may default contact the leasing company for help. In difficult situations, they may be willing to work with you for a few months. If you qualify for payment relief, the company may reduce or suspend your monthly payment temporarily.
The deferred payments will be tacked on to the end of your lease, so you will still have to pay them. However, the break can give you time to get back on your feet again. Leasing companies will not offer this option; you must ask for it.
Preparing your car
Before you turn your car in or trade your lease, it is important to make sure the vehicle is in top condition. Use these tips to prepare your car and protect yourself – legally and financially.
- Make sure the interior and exterior are clean. If you are reselling or trading the vehicle in, professional detailing can be a worthwhile investment. Cleaner vehicles often fetch higher prices.
- Check the tires. If necessary, inflate them to the proper pressure. Check tread depth too; the minimum acceptable tread should be stated in your lease. Replace worn tires with new ones.
- Document everything. Take plenty of pictures of the interior, exterior, and the tires. If the vehicle gets damaged in transit, you will have proof that it was in good condition when you handed it over.
Breaking your lease is not easy, but it is doable. It is important to consider all factors and weigh your options carefully before proceeding. If you need help understanding your lease contract or the course to take, ask a verified Expert for their insight. Experts provide customized answers at affordable prices, without waiting for regular business hours.