Breaking a car lease

breaking a car lease

Getting out of a car lease early

Lease Termination

It is often believed that the only option in ending a lease early is a car dealerships’ traditional definition of ‘early lease termination’ in which the lessee is required to pay an early termination penalty plus the balance of the remaining payments.

For example, if the payments are $700.00 per month and 10 months are remaining on the contract, then the lessee owes $7,000.00 ($700.00 X 10 payments) plus any penalty fees.

There are alternatives to paying thousands of dollars in early termination fees by using a Lease Transfer.

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How Does the Lease Transfer Process Work?

The basic lease assumption process is the same for all leasing companies.

  • First, the individual wishing to assume the lease submits a credit application to the leasing company.
  • Next, the leasing company will make a decision on the credit worthiness of the applicant.
  • If approved, the lease transfer documents are prepared and sent to the buyer and seller to be signed and returned to the leasing company.
  • Once the buyer and seller have signed the lease transfer paperwork, the seller will turn the keys over to the buyer and send the transfer paperwork to the leasing company.
  • Within a week or so the leasing company will send both the buyer and seller confirmation letters and will begin sending the monthly lease statements to the new buyer.

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Leasing Company Policies and Restrictions

As you might expect, every leasing company works differently. Not all leasing companies allow you to transfer your lease, and some set certain restrictions upon the seller when transferring a lease.

Here are some of the important factors to consider when attempting to transfer your vehicle lease:

Ability to Transfer – Not all leasing companies will allow you to transfer your leasing obligation. Some may require you to ride out the balance of your lease regardless of whether you find a qualified buyer or not. In this case you may consider re-financing your lease with a leasing company that does allow lease transfers, or selling your vehicle outright. Both approaches are explained later in this section.

Transfer Restrictions – Some leasing companies may put certain restrictions on the nature of your lease transfer. For example, your leasing company may not allow you to transfer your car to an out-of- state resident. Or they may not allow you to transfer your vehicle in the last 12 months of your lease.

Transfer Fees – Most leasing companies will also assess a one-time transfer fee upon lease transfer. Beware: some companies even charge the transfer fee before the buyer is credit-approved, which means there will be a charge assessed even if the transfer is not completed. The transfer fee can be paid by the buyer or the seller, depending on what your negotiation calls for.

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What are the fees associated with transferring a lease?

Aside from the fees that we listed previously, you may need to account for associated fees relating to the transfer of your vehicle. Here are some to consider:

Shipping – Most cars can be shipped anywhere in the continental U.S. for $500 - $1,000, depending on your carrier. Shipping often requires about one week between pickup and delivery, as most services pickup many cars along the way.

Advertising Fee – If you are advertising your lease in a publication, you may incur some costs associated with classified advertising in your local newspaper. If you are advertising on-line, your costs may be a little less, but it is not unreasonable to pay $50 - $100 to run your ad successfully.

Inspection Services - The buyer may request that the vehicle be fully inspected by a 3rd party vehicle inspection service prior to assuming the lease. We advise our customers who are looking to sell to have an inspection performed prior to advertising your vehicle so that you can provide this information for prospective buyers.

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Alternatives to Transferring your Lease

While transferring your lease will likely be your most cost-effective way of exiting your lease early, there are other alternatives.

Sell your vehicle outright

One option is to sell your vehicle outright. You may opt to do this if you want to walk away from your lease without going through the transfer process. To sell your vehicle outright, you must first buy your vehicle from the leasing company to assume full ownership. This requires making all the remaining payments as stated in your lease contract.

Here is an example of what your buyout would look like on a typical car with 12 months remaining:

  • Monthly Payment: $500 per month
  • Amount of Payment that is Principal: $300
  • Amount of Payment that is Interest: $200
  • Number of Months Remaining: 12

Now take the number of months remaining (12) multiplied by the amount of interest that is being paid per month ($200) to see how much money you would have to pay above the cost of your car.

In some cases the present value of your vehicle may not be high enough to make a purchase option viable for you. This depends on what the market will pay for the sale of your car. You can research sale prices on vehicles at Web sites like Edmunds.com.

By nature, a lease is not designed to be worth more than the market value of the vehicle at any point in time. Therefore, it may be difficult to sell your car outright without incurring a loss due to the difference in what you sell the car for and what you owe your leasing company.

If you wish to sell your vehicle outright, a good place to start is to call your leasing company and request the “buyout amount” of your lease. This is the total price that will be assessed by your bank to purchase your vehicle at that moment in time. Be sure that you get the most updated amount at the time of sale as this amount will change month to month (as you make more payments, it should go down).

Refinance your lease

Refinancing your lease can solve multiple problems. If you are leasing with a company that does not allow lease transfers, refinancing can create a new lease with a company who will allow you to transfer your lease (beware: there may be other restrictions with a new company including a time period where you cannot transfer the lease).

Refinancing is also a way to lower your payments by re-adjusting your lease term to a longer term. When you extend the term of your lease you often stretch out the depreciation of the vehicle which then lowers your monthly payment.

To refinance your lease, contact a leasing company directly and let them know you would like to initiate a refinance on your lease with that organization. We have found this to be easiest with independent leasing companies (leasing companies not owned by car manufacturers) as they are more likely to handle these transactions.

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How to Evaluate your Lease Situation

Many customers have asked us how we would evaluate the state of their leasing contract. Is it possible to find someone who would be willing to assume this lease? Will it cost a lot of money to buy this lease out? Is re-financing really a viable option? Once again every case is different, but let’s look at some factors that often contribute toward helping or hurting your lease situation:

Vehicle is Over Miles – So you’ve found yourself in a situation where your car is well over the allotted miles on your lease. What to do? One option is to pay the overage off directly to a seller upon transferring your lease. This is calculated based on the number of miles the vehicle is over at the point of transfer multiplied by the over mileage penalty imposed in the lease contract ($0.20 per mile, for example).

Another approach to consider is simply buying the vehicle out at the end of the lease. Most leases have a “buyout price” that states how much you should be able to purchase your car for at the end of the lease. If turning your vehicle into the leasing company will incur thousands of dollars in “fees”, you may consider buying the car at the buyout price and then reselling it yourself or perhaps refinancing it into a loan. This will help you avoid excess mileage fees. Beware: your vehicle may still be worth less than you are paying for it because of the additional miles.

Vehicle is at the Beginning of the Term - If you are 2 months into a 60-month lease term, you effectively have a relatively new lease. Anyone looking to assume your lease has nearly the same cost structure as if they were to lease the car brand new. You may want to promote the fact that you have already put money down on your vehicle or paid certain acquisition fees that the new buyer would not. But for the difference in cost, a seller may be more inclined to get a new vehicle with all the options they desire. Getting out of a lease from the very beginning is often the hardest thing to do. You are typically in the best shape to transfer or refinance your lease when you have less than 36 months remaining in your lease or have been in your lease at least a year.

Vehicle is Damaged – If your vehicle has damage that may impact the resale (or re-lease) of your vehicle, it is often more cost-effective to repair the vehicle at your own cost to make it more marketable than to try to pass off the damage in the sale of your lease. Sometimes, you may be able to get a lease buyer to negotiate the cost of the damages with you if the lease is a good deal or you are under miles.

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Lease Payment is Too High

If your payment is too high (compared to other comparable leases in the market) you can “buy down” the effective payment to a potential lease buyer by offering to put cash into your deal. It is not uncommon for a lease seller to offer a few months payments in cash upon transfer of the lease to “sweeten” the deal for a potential buyer. Another powerful and popular tactic is to reduce the monthly payment by offering a sum total of money and calculating the “savings” across each monthly payment. For example, if you have 12 months left on your lease, and your actual payment is $300, you could offer $1200 cash into the deal to bring the “effective monthly payment” down to $200. While the buyer will still have to make the original payment of $300, you can still market the vehicle as having a lower “effective” payment, which tends to resonate very well with prospective buyers.

Reducing your effective monthly payment is one of the fastest ways to get new buyers interested in your vehicle.

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Getting Money Back Out of Your Lease

What if you had put $5,000 down when you initiated your lease – is it fair to ask for that money back from a prospective buyer? Our advice is to avoid this practice if you can. Selling a lease can be challenging enough, but when you request money from the buyer as well, you are turning off a lot of prospective buyers who are interested in assuming a lease because they want to get a deal, not because they want to put a “down payment” into the deal.

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Getting a Premium for Aftermarket Upgrades

Perhaps you’ve put a beautiful new car stereo into your vehicle or have added some aftermarket upgrades that increase the value of your vehicle versus a stock vehicle. While everything is negotiable, popular wisdom suggests that getting your money back out of these items will often be difficult to do as well. You may be better served in either removing the equipment and selling it outright or using it as an incentive for buyers who would otherwise consider a stock vehicle that does not have these great options. Also remember that what is a great, valuable option to you may not be to someone else.

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