Leasing a car is a tempting proposition: Drive a brand new vehicle for a low monthly payment, then trade it in after two or three year—before the car even breaks out of warranty.
Money Under 30’s take on leasing is that it makes sense for business owners who can take a tax deduction for lease payments or for affluent drivers who could afford to pay cash, but prefer to have a new car every couple of years. For everybody else, leasing is a bad deal because you get stuck with a permanent car payment. (Yes, cars depreciate, but you can save significant money during years you’re driving a paid-in-full vehicle.)
And one more thing, it’s quite difficult to get out of a car lease. If you own your car, you can always sell it—even if you are still making payments. Moving out of the country? Lost your job and need to downsize your ride? Generally not a problem when you own your car. Leasing is another story.
The potential penalties for terminating a car lease early
Car manufacturers only make money on a lease if you make all of your payments. So, in order to keep you in the car lease for the duration of the term, leasing arrangements typically include a number of penalties that apply should you try to exit early.
According to DMV.org, penalties for terminating a car lease early include requiring you to pay some or all of the following:
- Remaining payments on your lease
- An early termination fee
- Costs related to preparing the vehicle for sale
- Storage and/or transportation of the vehicle
- Taxes associated with leasing, if any
- Negative equity between your lease amount and the current value of your car
Before making any effort to get out of your car lease, you should first carefully study your leasing agreement, to see which of these penalties are included. It is possible that all of them will appear in the lease in some form or fashion. However, the two most common are
- Forcing you to pay the remaining payments on your lease or
- Imposing an early termination fee
The remaining payments on your lease penalty will be the most costly if it requires actually making you pay all of the remaining payments. For example, if the lease term is 36 months, and you decide that you want out after 21 months, you will be required to pay the remaining 15 months if you terminate now. If the monthly payment is $300, you will have to come up with $4,500 ($300 x 15 months) in order to get out.
Some car leases do not specifically require making the remaining payments, but instead impose some sort of penalty. That penalty could be listed as a flat amount, or it can be expressed as a number of monthly payments.
Early termination fees can also be based on a sliding scale. It may call for making three extra payments if you terminate the lease during the first 12 months, two payments if you terminate within the second 12 months, and one payment if you terminate within the third 12-month time period. The possible combinations can vary widely.
Obviously, either of these types penalties can be stiff. But it’s set up that way on purpose, to keep you from looking to get out early.
How can you get out of a car lease and minimize the penalties if you want terminate the lease early? Let’s discuss the possibilities.
Return the car to the dealer or leasing company
This is by far the simplest way to get out of a car lease, but it’s also potentially the most expensive. It’s simple because the dealer or leasing company will handle all of the details for you. But it’s more expensive because all of the penalty provisions contained in the lease agreement are likely to apply.
This will include paying the early termination fee, as well as the remaining depreciation of the vehicle. In effect, the leasing company will sell the car at wholesale (through an auction), which will provide the absolute minimum value of the vehicle. You will then be required to pay the difference, and that will be substantial.
Buy, then sell the vehicle
Car leases typically contain provisions that enable you to buy the car outright during the term of the lease. This can make abundant sense if the payoff or buyout of the lease is less than the resale value of the vehicle.
For example, if the payoff or buyout is $20,000, and the market value of the car is something higher, you will be able to buy the car from the leasing company and then sell it. There will usually be an early termination fee equal to several hundred dollars, but that may be a small price to pay for getting out of the lease early.
To do this, you first need to get the payoff or buyout amount from the leasing company, and get it in writing. Second, you need to determine the current value of the vehicle on resale. You can do this through websites such as Kelly Blue Book or Edmunds.com.
If the sales value of the car is a little bit less than the payoff or buyout price, you might still find that this is a less expensive way to get out of the lease than other methods.
Use a lease-trading website
You may be able to give your lease to someone else. Whether you can do this will depend on if it is permitted within the terms of your lease agreement, is acceptable to the leasing company, and is legal in your state.
There are website that specialize in lease trading, like Swapalease.com and LeaseTrader.com. Much like selling a car online, you list your car and payment information on the site, to find a party who will be interested in assuming your lease under those terms.
Buyers may be interested in assuming the remaining term of your lease because they are only looking for a short-term arrangement, or at least one that is shorter than those that are offered by new car dealerships. The buyer may also be looking to avoid large a upfront cap cost payment on a new lease.
The websites do charge a small fee for listing your vehicle, and you will also have to pay some sort of transfer fee to the car leasing company. Be that as it may, those fees are likely to be considerably lower than traditional early termination fees.
This method of terminating a car lease is not always foolproof however. Some lease agreements require that you as the original holder of the lease will remain part of the arrangement until it is formally terminated. That means you may still be held responsible for certain costs at the end of the lease term, including damage to the vehicle and excess miles. This is referred to as “post-transfer liability”, and it will also leave you in a position of effectively being a co-signer on the lease, even after it’s assumed by the other party.
Buy a new car through the same dealer
This strategy won’t eliminate all of the early termination penalties, but it can minimize them. If you purchase a new car from the same dealership where you leased your current car, they may either waive certain penalties, or at least reduce them.
Be careful however, as this strategy has a major drawback. Car dealerships typically bury certain exit fees on the lease within the terms of the new purchase. For example, if it will cost $2,000 for you to terminate the lease on your current vehicle—even after penalty reductions—the dealership will “roll over” that amount to the loan balance on the new car.
If you’re purchasing a $20,000 car using 100% financing, you could end up being saddled with a $22,000 car loan – the $20,000 needed to purchase a car, plus the $2,000 shortfall for terminating the lease early.
It will make for a hassle-free lease termination, and it will also avoid the need to come up with cash out of pocket. But the fact that the lease termination penalties will be added to the new purchase will leave you “upside down” on the new car. That’s car dealer-speak for the fact that you will owe more on the new car than it is worth.
Default on the lease
This is really not a strategy, but a “no other way out” method. If you can no longer afford to make the payments on the car, you may have to consider defaulting on the lease. That would get you out of the monthly payment, but it will also create other problems that are less immediate in nature.
Should you default on the lease, your credit will take a big hit. It will be the equivalent of an auto loan default. As such, you will likely face a collection or judgment for the unpaid early termination penalties, as well as any unpaid lease payments and collection costs connected with the default.
This should be an absolute last resort, and only if you’re unsuccessful using the other methods.
It’s not easy to get out of a car lease early. In the best case scenario, you can find someone to take over your lease payments for the remaining term or a lease buy-out as part of buying a new car with the same dealership. Otherwise, you’ll end up paying significant early termination penalties equal to several months’ lease payments.