During my latest car hunting process, one of the questions I had was what to do with my three-year lease agreement with 20 months remaining. In September 2014, I decided to lease a Honda Fit for my business for only $235/month after tax. About 80% of the cost is deductible since I primarily use Rhino for going to conferences, visiting consulting clients, and giving the occasional Uber ride when they are going my way.
When I was in my 20s, I’d always just pay cash for a vehicle and flip it a year or two later for even money or a small profit. I loved the hunt and the negotiation process. As I got wealthier, I put more value on time and simplicity. I wanted minimal maintenance headaches. I also wanted the option of just handing the keys in when my lease term was up.
But due to the desire of owning a mid-life crisis car and only having one indoor parking spot, I wanted to learn what my options were for an early lease termination. Perhaps some of you want to terminate your car lease because you are bored with your car. Or maybe you’re relocating for a job or just can’t comfortably afford the payments anymore. Here are your options after speaking at length with a couple vehicle leasing department personnel.
Options For Terminating A Car Lease Early
1) Pay off all remaining lease monthly payments. This is the dumbest option you can choose because you presumably want to get out of your lease or no longer want the car. There’s no advantage paying off the remaining monthly payments and returning the car to the dealer.
2) Sell your car back to dealer. The dealer will probably low ball you because they know you are either in a financial bind, got to move, or simply don’t want the vehicle. Dealers have overhead to cover and should expect to make a profit for taking on the risk of buying the vehicle.
3) Transfer the lease to a third party. Try finding a third party, friend, or family member to take over your lease. There’s less of a financial hit to you as there’s simply a transfer of the lease agreement. Check to see if there’s a transfer lease fee (BMW has one that costs ~$500), a fee for the leasing company to check your credit to see if you qualify, and a new registration fee.
4) Sell your car to a third party. If the third party pays off the vehicle with cash, you will get the title in the mail and then have to transfer the title. If the third party refinances the lease through a credit union or bank, the credit union or bank gets the title. You must have a conversation with the financing company and dealer to make this transaction happen. This method can save you money, but it will take time.
5) Pay off the vehicle in full and keep it. Ask the leasing company how much it would cost to pay off your vehicle in full. Once you do, you will no longer have lease payments. After 20 months of lease payments, I can pay off my $19,200 pre-tax Fit for $15,792.48. If I continue paying the lease for the full three-year term, the residual value I will pay is $12,746.75.
6) Buy out the lease with a credit union or bank and change lease to purchase vehicle. If you want to keep the vehicle, you could go to a credit union or bank to finance the vehicle by having them buy out the lease. The credit union or bank would have title until you pay them off. I’m not sure why you would select this option unless you have terrible lease terms.
7) Trade your lease in for another lease. Car dealerships love this option because they get to lock you in for a longer period of time. They want repeat customers who will provide them with steady profits. They will do all these backend calculations to ensure they make a profit while also making you feel you got a deal with your new lease. Just make sure you do the math to see if you really are.
8) Voluntary surrender. This is the worst option. A voluntary surrender is when you stop making payments, hand the keys back to the dealer, and tell them you have nothing left to give. The car dealership will either try and resell the vehicle on premise, or sell the vehicle at an auction. You will see a 7-10 year black mark on your credit report.
What Do Most People Do?
According to the Honda leasing specialist, he said most people do the following after knowing their options:
1) Sell the vehicle back to the dealership and take a financial hit. The benefit is convenience. Most people who go this route are relocating.
2) Try and get a third party to take on the lease for a smaller financial hit. You might as well throw your ad on Craigslist and see what happens if you have time. Maybe someone would love to lease your car less than 36 months, especially if there is no downpayment or transfer taxes.
3) Own up and fulfill the lease agreement until the very end. Doing what you say you will do is always a good thing. For example, if everybody paid their mortgage, the financial crisis wouldn’t have happened.
Do The Math To Choose The Best Option
When you call the leasing company, always ask three things:
1) How much would I have to pay to buy the vehicle outright?
2) What is my residual value (the amount you get to buy the car at the end of your lease term)?
3) What is the total amount left on my lease payments?
Getting the answer to these three numbers will help you decide what best to do.
Take how much it costs to buy your vehicle outright, subtract the number from the residual value, and compare the number to what’s remaining on the total amount left on the lease payment. The difference is the PROFIT the car dealership is making, or the extra money you are willing to pay to not have to buy the car outright.
In my case the math looks like this:
$15,792.48 to buy my vehicle outright today
– $12,746.75 the residual value after the three-year lease is up in September 2017
My total lease payments remaining for 16 months is $3,761.12.
= $715.39 is the dealership’s profit, or how much extra I have to pay if I don’t buy the car up front. Prior to taking on this lease 20 months ago, I calculated that I would basically be paying a ~$1,100 premium to lease this $19,200 car instead of paying cash for it. Paying $1,100 extra over three years was worth it to me because I value the option of being able to turn in the key.
I have no desire to buy Rhino for $15,792.48 today because I’m thinking about getting a mid-life crisis car now or when my lease is up. Perhaps I’ll grow more attached to Rhino by September 2017 and want to own him outright for only $12,746.75 after I build a second parking spot. Who knows!
Related: When Is the Best Time To Buy A Car?
Making The Least Bad Choice
Purchasing a car for more than 1/10th your income isn’t necessary. However, we’re a rich nation full of excess, so it’s sometimes hard to restrain ourselves. Leasing a vehicle can be risky because it enables us to drive a vehicle that we might not be able to comfortably afford. But on the flip side, leasing a vehicle can keep the most avid car enthusiasts disciplined due to the hassle and penalties of terminating a lease early.
It’s always good to know our options before we sign any financial contract.
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