This Is How To Get Out Of A Car Lease
This comprehensive post was written by Stephen Yao, a financial engineer with expertise in life insurance, pensions, and capital markets. He offers great advice on how to get out of a car lease if you agreed to a bad deal.
Getting Out Of A Car Lease
Like most people, you may need a car from time to time, whether for work, school, trips, or other necessities. However, as more of us are working from home, and the cost of renting a car long-term might not be worth it anymore. Do you really want to be paying that $300-$400 a month for your car lease when you drive your car, maybe once a week? Paying for a vehicle, gasoline, or even parking is now too costly and might even be a massive drag to your finances.
So, let’s get into some options available to you when getting out of a car lease. I have ranked each choice in terms of difficulty level (1 = easiest and 4 = most difficult, in terms of time and risk).
1. Transfer Your Lease
Perhaps you have a friend or family member that’s looking for a car to use. Good news, you can transfer your lease to them.
Some lease contracts may have a fee to transfer leases, but given the transfer costs are less than your total remaining lease payments, this may be the best route to go.
There are various reasons why someone would want to conduct a short term car lease, which can include:
- They want to avoid the hefty down payment. Typically, down payments for car leases can be up to 20%, but transferring the lease allows the new lease not to pay the down payment and only the monthly lease payments.
- Short-term car lease takeovers are cheaper than paying higher fees to rent a car from a car rental shop if the car lease does not have substantial monthly payments left.
Additionally, it is essential for individuals willing to do a car lease takeover to ensure they have a good credit score. Many lease takeover provisions require a solid credit score to ensure the remaining monthly lease payments.
Verdict: This option is straightforward, but the tricky part is finding a person who would be willing to take on the remaining car lease.
2. Defaulting on Your Lease
It is quite simple to default on a car lease; just stop paying the lease. The dealership will repossess the car, and the lease ends.
However, the drawbacks of this option are:
- You take a hit on your credit, and it makes financing a car difficult the next time;
- The lessor may come after you as you may be liable for early termination fees.
Verdict: Obviously, this option’s downsides heavily outweigh a car lease’s monthly payments.
Think about it – With a lower credit score, you may be ineligible for better interest rates when purchasing a mortgage for a home, which could result in significantly higher interest payments.
3. Early Lease Termination
When leasing a car, you always have the option to return the vehicle to the dealership. However, most car dealerships have included early termination clauses in your contract to avoid too many car returns and cover the costs of setting up the lease itself.
An early lease termination is slightly less risky than defaulting on your car lease, but it may not be worth it if the early termination fee is too high. Typically, the total charges needed for early termination will include the early termination fee of around $200 to $500 and any remaining depreciation costs.
Case Study (Example of a Good Early Lease Termination):
Excess Mileage Fees = $1,000
Excess Wear-and-Tear Charges = $500
Early Termination Fees = $500
Monthly Lease Payment = $200
Number of Months Left in Lease = 12
Based on the following depreciation fees and early termination fees, you would need to pay up to $1,000 + $500 + $500 = $2000 to terminate early on your lease. Paying $2,000 would only make sense if the total remaining lease payments (number of months left in lease * monthly lease payment) > $2,000. In this case, the total remaining lease payments is $200 * 12 = $2,400. So it would make sense to terminate early on this lease as you would be paying a total cost of $2,000 and saving $400 from not taking on the additional monthly lease payments.
Verdict: This is a safer option than defaulting on your car lease, but there are more profitable options you can leverage if the early termination ends up costing you more money.
4. Buy-Out Provision
Going a step further from the early lease termination option, you can undergo a lease buyout strategy.
The strategy is simple:
- You terminate your lease and take on the early termination fees;
- You buy out the car at the fair lease buy-out value;
- You resell the car given that the vehicle is worth more at the market price than the fair lease buy-out value.
This option covers depreciation and early termination penalty costs, but ONLY IF the math works out.
Let’s go into a bit more detail about this.
Case Study (Example of a Good Lease Buy-Out):
Car Lease Buy-Out Price = $10,000
Current Value of Car = $10,500
Early Termination Fees = $500
Excess Mileage Fees = $1,000
Excess Wear-and-Tear Charges = $500
Monthly Lease Payment = $200
Number of Months Left in Lease = 12
So in this example, there is a lease buy-out option available to us. If we buy the car at the lease buy-out price of $10,000, we can ignore the depreciation fees ($1,500) and sell it at the market price of $10,500.
This example will give us a gain of +$500 from the car sale, and we can subtract the early termination fees of -$500. We will then end up with a total cost of $0. In this case, we have entirely avoided the $2,400 total remaining lease payments.
Verdict: The lease buy-out option works out well when the car’s current market value is higher than the lease buy-out price or if the remaining total lease payments are substantially increased.
Conclusion
Ultimately, there are many options available to you to get out of a car lease, and each option has its pros and cons. Most importantly, you need to review your lease terms diligently to ensure you make the best choice.
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