Wednesday, December 10, 2008

Misunderstandings About Getting Out of Car Lease

Many people who lease cars don't really understand leasing and how it works, including how to get out early.

First, leasing is not renting, as many people think. You can't simply return your car before lease-end. A lease is designed to be completed, and is a legal contract to do so.

A car lease is a form of financing like a loan. From the beginning to the end, there is a balance remaining each month. However, unlike with a loan, there is no way the leasing customer can know exactly how much is owed without contacting the lease company. It is not simply the sum of remaining payments, as many people believe.

Getting out of a car lease is not simply returning the car and paying a small "penalty." Although some lease companies do charge a penalty, the more significant cost is the account balance, after subtracting the car's auction sale price. This amount, for most people, will be thousands of dollars.

You can't end your lease by sub-leasing to someone else -- someone who will take your car and make payments. To do so violates your lease agreement and puts you at risk. However, with your lease company's permission, you might be able to "transfer" (not sub-lease) your lease to another party. Some lease companies allow it, some do not. You should contact your lease company to find out.

It is usually not practical to try to trade a leased car, say, for a less expensive car. Since most leases are "upside down" there is no trade equity. It would be unwise and financially impractical in most cases to add the negative equity to the price of another car. Even if you were allowed, the large amount of negative equity would make your new car much more expensive, and you would be even more upside down.

Exiting a Car Lease in a Tough Economy

The current economic downturn has created problems for many people who are now leasing cars. People have lost jobs, lost income, or have otherwise become financially distressed. It's not unique to leasing but the problem is somewhat different than for people who are buying a car with a loan.

Leasing is a method of financing that is based on only paying for the amount that a car will depreciate in value by the end of the lease. In fact, the estimated lease-end value is stated right in the contract and monthly payments are based on that value. Therefore, each monthly payment, unlike with a loan, is pre-determined based on the assumption that the lease will be completed as scheduled. It is for this reason that leases are much more difficult, and more costly, than loans to end early. Breaking a car lease can be very expensive.

The reason that a car lease is so expensive to end early is that the lease company has the right (it's in the contract) to recalculate everything, including the car's value and the amount remaining to be paid. The method used is not customer-friendly. It's explained in the fine print of the lease contract, but is almost impossible to understand.

Most customers are surprised at the high cost of an early lease termination. Other than the method used (discussed above), there are two other reasons a termination is expensive.

First, lease payments are "even" every month, in terms of the amount applied to the cost of the car and the amount applied to interest (finance charges). The amount applied to the cost of the car doesn't keep up with un-flat rate that a car depreciates in value. Lease payments don't keep up with the rapid rate of depreciation until very near end of lease. Therefore, the amount owed on a lease will nearly alway exceed the value of the vehicle, until very near lease-end.

Second, the amount owed for an early termination is based, in part, on selling the car at a wholesale car auction. Sale price is subtracted from amount owed. Since the sale price can be very low at such an auction, it won't reduce amount owed by as much as might be expected.

What to do?

Make sure you understand the numbers. Call your lease company and get your early termination payoff amount.

Try to find a way to complete your lease. Work out payment plans with your lease company. It is the easiest, cheapest, and least damaging way.

Try to find someone to take over your lease. Some lease companies allow it, others do not. Try a company like Swapalease.com who matches lease "sellers" with "buyers."

Avoid a repossession at any cost. Even voluntarily returning your car and stopping payments without paying early termination charges will damage your credit for 7 years, and you'll still be sued for the amount you owe.

Saturday, September 02, 2006

Getting Out of a Car Lease is Not Easy

Why is not easy to get out of a lease?

Leasing is an old business concept that was around long before it was introduced to automotive consumer leasing. The concept has remained virtually unchanged, as has the language of leasing, even though consumer leasing is not quite the same as business leasing.

In the past with business leasing, it was almost unheard of to end a lease early. For example, a business might have leased a construction vehicle for, say, four years, and completed that lease as contracted. Simple.

Because business leases were always completed on schedule and never ended early, some shortcuts could be taken in how lease financing was arranged. A simplified payment calculation that assumed level depreciation was adopted. Of course, we all know that any equipment, including motor vehicles, depreciate more rapidly in the first year or two than later. This means that the equipment loses value faster than the lease is paid off. But this didn't matter as long as the lease was completely paid off on the agreed-to schedule.

Enter automobile consumer leasing. People want out early for any one of a number of reasons - don't like the car, like another car, lost job, lost health, divorce, and other reasons. Since the same payment methods are used as are used in business leasing, this presents a problem. At the time the consumer wants to end his lease, he most likely owes more on his remaining lease balance than his vehicle is actually worth, due to a rapid early depreciation rate. This means, in order to end his lease, he will have to pay the difference between what he owes and the market or auction value of his vehicle. This can often amount to thousands of dollars. On top of that, many leasing companies add a early-termination penalty fee.

If you absolutely must get out your lease early, read my other posts for possible solutions. If none are found, consider simply riding out your lease until the end when you'll owe nothing more. And by all means, avoid any form of repossession. It will ruin your credit history -- and you'll still owe the money.

Friday, August 11, 2006

Car Lease - The Wrong Way to Get Out

Many people who lease cars often assume that leasing is like renting. Based on that erroneous assumption, they believe they can simply return their vehicle to the lease company if they become unhappy with it, or can no longer afford it.

This is the wrong way to get out of a lease early. To simply return a leased vehicle to the finance company or bank is a form of repossession, sometimes called "voluntary" repossession. This can cause serious damage to the person's credit history. It can create future problems with getting loans, mortgages, and even car insurance.

Furthermore, the lease company will take action to collect the remaining balance owed on the lease after the vehicle has been sold at wholesale auction. The difference can easily amount to thousands of dollars.

By simply returning a vehicle and walking away before normal lease completion, a person can destroy their credit rating, create a financial disaster, and end up with no transporation, all at the same time.

This is not the way to get out of a car lease.

Tuesday, August 08, 2006

When to Get Out of Car Lease

People who want to get out of a car lease do it for a variety of reasons, and at different times in their lease.

Some folks simply realize they don't like the vehicle they just leased, and want out. Unfortunately, there are no laws providing for returning motor vehicles. And most lease companies have provisions in their lease contracts that prohibit lease termination within the first 12 months.

Many companies also prohibit early exit within the last few months. This not usually a problem since the cost of simply continuing to make payments can be less than the cost of getting out early.

In most cases, the least costly strategy is to stick with the lease until the end, when you can simply return your vehicle and walk away. If this is not possible, be prepared to pay for the privilege of an early exit.

How to Get Out of a Car Lease

Many automobile consumers find it easy to get into a car lease but difficult to get out.

To get out of a lease usually means a process of "early termination", as lease companies call it. Unfortunately, the process is typically expensive. It's similar to being "upside down" on a car loan. More is owed on the lease balance than the vehicle is worth at the time of the desired termination. The customer is responsible for paying this difference.

To get out of a lease early is not the same as exiting at normal lease-end. You can't simply return your vehicle and walk away. Your lease company can tell you how much it will cost you to get out early.

The best and least costly way to get out of a lease early is to have someone "assume" your lease. This is a process by which you transfer responsibility for the lease to someone who is interested in taking your vehicle and making the remainder of your lease payments. Your lease company must approve first. Be aware that not all lease companies allow lease transfers.

Finding someone to take over your lease is not as easy as it may sound. There are a number of online companies with names that imply lease swapping or lease trading or lease takeover. They all do the same thing. They help match up lease "sellers" with lease "buyers." There are fees involved but the cost if far less than an early lease termination.