Monday, October 02, 2023

Exiting a Car Lease in a Tough Economy

Any time the  economy decides to take a downturn it creates problems for many people who are now leasing cars. People lose jobs, lose income, or have otherwise become financially distressed. The car-related problems are not unique to leasing but it's 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.