Just starting to fall behind on your lease payments?
Rather than falling further in the red, what might sound like the best idea -- to fess up and bring the car back to the dealership, hand them the keys, and be free of the burden -- actually is the worst. Before you go ahead and do this, you should think about your options, and how much grief the move might cost you in the long run.
Even if you bring the vehicle back spotless and clean, with very low miles, before the lease terms are up, without 'settling' the lease or paying the remainder, it's considered a 'voluntary repossession.'
And while the term 'voluntary' sounds more positive to the customer and the dealership, it won't go down on your credit history much differently than a traditional repo-man job.
"If there's a repossession on your credit report it would do serious damage to your credit," said Rod Griffin, director of public education for the credit information firm Experian. And any repo, said Griffin, even if it's voluntary, would result in "a substantial credit decline" and will have "a severe affect in the long run." Such a walk-away from responsibility will remain a glaring warning visible to any lenders for seven years, he said, affecting you in very significant ways in everything from credit cards to mortgage qualification. And personal bankruptcy? Don't think about it, advised Griffin.
Lots of lessees looking for an out
If you're feeling that pinch, you're not alone. According to data from CNW Marketing Research, from its Lease Trak and Purchase Path surveys, nearly 24 percent of lessees who had to break a lease so far in 2009 have cited a change in their job status as their primary reason. That's up from less than 19 percent in 2007. Also, more than 21 percent said that their primary reason for opting out of their lease was that their lease payment was too high; in 2007, only about 12 percent thought that.
About one in every five leases will be terminated early in 2009, according to CNW, and what's surged most is the number of months left on leases at the time of early termination; at the beginning of this decade, the average early termination had less than four more months of payments remaining, but that has surged to 12 months last year and more than 15 months this year.
"Pretty much, voluntary or involuntary, it's still going to show up the same way on your record," said Tarry Shebesta, president of LeaseCompare.com, a retail leasing outlet and information site. The key is to avoid getting there in the first place.
The first step, which some people forget about until they're in over their head, is to simply call and ask. "If you're in a situation today, the first thing to do is to always talk to your lender or leasing company," said Griffin. "They may make changes so you an continue to make payments." Shebesta said that banks might give you a little more wiggle room on a payoff, but they're not going to knock much off your monthly payments or settle for a dramatically lower amount.
Hold on, consider the options
Top 20 Selling Vehicles
Sales data shown is of top 20 selling cars and trucks as compiled by Autodata Corporation.
If you've talked to your lender and informed them of the situation, and the payments are still a problem, before you walk away from the lease you should consider several less-damaging options to get out of the lease: pay it off, buy it out, trade it in, or try to get someone to assume the rest of your lease.
The first option, paying it off, might sound silly to suggest, but it could be beneficial. If you do think you'll have a job a year from now, your lease is just a few months from ending, and your credit-card limits are high, you might want to consider simply paying off the remainder of the lease (the sum of all the payments yet due) on a credit card. You will of course be paying a lot of interest over the long run, but you'll be free of costly insurance payments on the newer vehicle and provided you can maintain your card payments you won't destroy your credit as you would going deadbeat on the lease.
Buying out-often meaning paying off the lease and purchasing the vehicle at a price predetermined at the time the lease was written-is another option, but even in most cases where you haven't yet fallen behind on payments, it doesn't make much sense. The problem with a lot of leases, said Shebesta, is that, even with just a few lease payments left they leave you in an "upside down" financial state-meaning that you would owe the leasing company far more to buy the vehicle and end the lease than you could get selling it.
This is more the case with some types of leases than with others. Leases hinge heavily on a pre-negotiated resale value (predicted by the residual), which in the cases of so-called captive finance companies (GMAC, Volkswagen Credit, or Toyota Financial Services, for example) is often overly optimistic so as to yield lower payments that would in turn sell more new vehicles. But beware, said Shebesta, these lease arrangements that seem so attractive at signing are typically more difficult to get out of when you're in a pinch-with the official resale value often far more than you could get in a private-party sale. "Leasing on a subsidized residualit's going to be much more costly to buy out."
Another option to consider-only for a select few, especially families with multiple cars-is to go back to the dealership and trade the leased vehicle for another much more affordable one. If you haven't missed payments yet and are consolidating from, for instance, two vehicles to one (one of which is a lease), you might qualify for a new one, and the dealership would assume your existing lease.
Try putting your lease on the market
Finding someone to assume the rest of your lease (often called lease trading), through a company like LeaseTrader, is likely the best possibility to help get out of a lease without scarring credit. Even once you find someone to assume your lease, it doesn't come free. For instance, it costs nearly $190 to use LeaseTrader the first time, and the finance company or bank will commonly charge a fee of up to $600 (or in aome cases $1,000 or more) to transfer the lease. Officially the person assuming the lease is supposed to pay that, but you might be footing some of that bill as well to encourage the deal. And that's before counting fees due to the DMV and the state.
Again, whether or not it might make sense to pass off your lease itself to a second party depends a lot on the leasing company. Some companies have very specific stipulations on when you're allowed to transfer leases. For instance, Mercedes-Benz Financial won't allow you to transfer your lease in the first or last six months, while the Honda and BMW captive finance companies are among the many that don't allow lease transfers in the last six months. Also, make sure the arrangement is explicit about making the second party-not you-liable for the rest of the lease.
See here for a LeaseTrader chart, indicating the differences in policies between leasing companies.
"Lease-trading has always really been a niche market," but it's worth trying, advised Shebesta. Vehicles with lower miles, better condition, higher residual values, and lower monthly payments will always do better, he added.
There are a couple of other smaller outs worth mentioning. If you're active-duty in the military, you might be off the hook. Under certain circumstances (such as relocation) the Servicemembers Civil Relief Act (SCRA) might allow early termination of your lease without a penalty. Also, if a leased vehicle is lost or stolen, the lease policy GAP insurance covers the rest of the lease. However, we bet that GAP insurers are being very diligent about fraud.
Damage controland recovery
How can you do a better job with your next lease? A lot of it hinges on the terms, according to Shebesta, and making sure the lessee didn't lease simply to get into a more expensive vehicle. "We really recommend staying around the three-year term."
"It always starts with going into a lease the right way," said Shebesta, which includes sticking to a debt-to-income ratio (including mortgage, lease payments, credit-card payments, and any other loan payments) that's no more then 40 percent. Several years ago, banks weren't paying as much attention to that, he said.
Credit reports haven't changed, but lenders' tolerance for risk has, agreed Griffin. He says that especially if you have something like a broken lease on your record, lenders will look at details that would have been glossed over a few years ago. "They're looking at things longer, and looking more closely at your actual credit history."
Griffin says that there are two important ways to approach repairing your credit after it's been damaged by something as severe as breaking a lease. "First, the key is to as quickly as possible begin to establish a positive payment history," said Griffin. "It's going to help you recover more quickly." Secondly, Griffin added, you should begin saving money, so that you can prove you've learned your lesson. If you have any blemishes in your credit history or broken leases in your past, whether or not you get that lease in the future might very well depend on your assets and savings. "It's really a whole picture and the credit report is just a part of that," said Griffin.
In today's economy, because credit is so limited and tolerance for risk is low, it's far more significant to stay on credit's good side than it was in the recent past, said Griffin. If there are remaining ways you can avoid defaulting or becoming delinquent on payments-such as borrowing money from friends or family-then by all means use them.
The bank of mom and dad, perhaps? Sometimes it's priceless.
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