Car Lease Termination

Car Lease Termination

Car Lease Termination - First Make Sure You Get the Right Lease Type

Is early car lease termination possible?  It depends. There are two different kinds of car leases.  A vast majority of leases are what’s called Closed-End Lease - and this type of car lease is what most experts would recommend for consumers.  


Before you sign the contract, make sure you are getting the right one.  Here’s a discussion to explain the differences and benefits of each.

Closed-End Lease

This is the type of car lease that most consumers get.  Also called “walk away lease”, this type allows you to return the vehicle at the end of the lease period and as the name implies, you walk away from the lease without being responsible for anything except for excessive wear and tear and mileage charges.  


How are lease payments determined?  The amount of the lease you pay is the difference between the purchase price of the vehicle and its residual or salvage value (the predetermined value of the car at the end of the lease period).  


Residual value is determined by the leasing company based on historical and industry guides.  It is based on the premise that the number of miles driven is relatively predictable - around 12,000 miles per year and that the vehicle will not be driven in extreme or abusive conditions.


The amount of salvage value that a company includes in your contract impacts the monthly payment due.

Car Lease Termination options

There are several pluses to a closed-end lease:

  • Freedom from any more responsibility apart from wear and tear (excessive at that) and mileage charges


  • If residual value of the vehicle at the end of the lease period actually turns out lesser than the one predicted, it is the leasing company that takes the hit, not you as the consumer


  • On the flipside, if the vehicle is worth more than residual and there is an option to purchase, you can choose to buy it and keep using it.  Or you can actually make a profit, should you decide to sell it.


It is important to remember that if you plan to drive more than 15,000 miles a year or even lower at 12,000 miles a year, you have to pay for extra mileage.  The going rate for every mile over the limit range from 15 cents to 25 cents, depending on the kind of car you are leasing.


You may want to consider an open-end lease (see discussion below) if you are this kind of car user who normally drives many more miles than those 12,000-15,000 miles/ear.


An important note -- Most consumer leases are closed-end leases.  However, if this is the option you want, you need to make sure that it clearly indicates that it is a closed-end lease.  


Open-End Lease

Compared to the above, open-end leases are more primarily used by commercial businesses. The lessee, rather than the leasing company, takes the financial risk because they are responsible for paying the difference between end of lease value (or residual value) and the actual market value of the vehicle at the end of the lease period.


This could mean a substantial amount if the market value of the vehicle has dropped significantly.


Residual value for business open end leases tend to be lesser compared to a non-business open end lease.  This reduces end of lease risk, but can significantly increase the monthly lease pament amount due.


Why do businesses opt for this option?  Vehicles leased for business tend to rack up a greater number of miles a year.  Therefore, companies would rather pay for the diminished value of the vehicle instead of paying for mileage charges.


Why Lease?

Car Lease Termination pluses

If you like the idea of having a new set of wheels to drive every 4 years and you do not have the money for monthly payments for a new car, leasing is the way to go. There is lesser out of pocket cost versus purchasing and maintaining a car.  


In addition, leases require just a little, and sometimes no down payment at all.  And certainly no upfront sales tax payments.


Most of all, monthly lease payments are usually lower than monthly car payments.  And you get to drive a new car every few years.


Car Lease Termination - Breaking a Lease:  Yes, It’s Possible But ….

Early termination of a lease is possible and anyone can break their lease at any time - at a cost.  Before we go into the possible consequences of an early lease termination, let us look at some of the reasons why people do it:


  • Needs have changed. Perhaps there’s a baby coming and that sports car cannot fit into the eventual lifestyle change anymore or you just want a more fuel efficient vehicle.


  • You’ve moved. Maybe your new location is commuter friendly or parking may be prohibitive. These reasons could leave you opting out of your car lease.


  • Mileage change. If your commute becomes longer and farther, you can get hit with mileage charges.


  • Change of mind.  It’s a simple as not liking the vehicle you have leased, as much.  Or perhaps, you are in a better financial position and you’ve decided to do an upgrade


The Consequences

Car Lease Termination costs

As we’ve said, it can be done, at any time but at a cost.  If you decide to return the vehicle before the lease expires, prepare to pay stiff early termination fees.  What do you pay for breaking your lease? It varies from one dealer/leasig company to another but here are some penalties you pay when you do. They can include:


  • Remaining payments on the lease


  • Fee for early termination or penalty. Depending on the leasing company, this could be a flat amount, or may be expressed as a number of monthly payments.  Or it could be a variable amount based on when you terminate the lease.


For example, you make 3 extra payments if you terminate during the first 12 months, 2 extra payments if done during the 2nd 12 months, and 1 extra payment if you terminate within the 3rd 12 month period.


  • Storage and/or transportation of the vehicle


  • If the vehicle would be put up for sale, cost related to preparing it for this


  • Leasing taxes, if applicable


  • Negative equity that results between the lease amount and the current value of the vehicle.


Car Lease Termination - What You Can Do?


The most traditional way of breaking your lease is by returning the car to the dealership. This is the most expensive option you can take.  With this choice, you will have to pay all penalties, even make all the outstanding payments plus any additional penalties and fees.  


There are other several ways to break your lease without breaking the bank:


Trade in for another vehicle.  It is possible to lease another vehicle, if you are getting it from the same dealership.  You would still have to pay for the penalties and fees. However, these will be incorporated into the new vehicle contract.


This will make the payments higher for the new lease  but this enables you to pay the penalties from your former lease over an extended period of time.


Lease swap.  This means  you find someone to take over your lease.  With this kind of arrangement, you find someone to assume the balance of your lease payments. You need to check if this is allowed as set by your lease agreement and if it is legal within your state.  


If this is an option you want to explore, there are lease-trading websites that do this for a fee. It is similar to selling a car online where you list your car and payment information on site.


There are also transfer fees involved paid to the leasing company. However, all these fees would likely be considerably less than a traditional lease termination.


It is important to remember that with this kind of arrangement, you may still be recognized as the owner of the lease. This means you are still held liable for certain costs at the end of the lease term, including damage to the vehicle and excess miles.


Therefore, you must exercise caution when exploring this option.

Purchase the vehicle.  If you wish to purchase the vehicle outright at any point during the duration of the lease, you may do a buyout or payoff.  The amount may be above market value and you could potentially pay more for the vehicle than what is actually worth. And of course, ou can roll that purchase into a standard car loan.

Sell the vehicle. You can use the payoff value set by the leasing company to set the selling price of your car. The drawback is if the payoff set is high and you may have to absorb losses when you sell your car. However, this may still be a less expensive option than if you continue to pay outstanding monthly payments on the lease contract.


Additionally, selling the vehicle enables you to avoid penalties for excess wear and tear, and possible mileage charges if you have exceeded allocated lease mileage.


Car Lease Termination - The Bottom Line


Getting out of car lease early is not easy. Car lease termination penalties are harsh.  But it is possible to avoid these by considering the options given above.


Tags: Car Lease termination, car lease types, end my car lease, closed end lease, open end car lease