When You Have To Break Your Car Lease
How To Cut Your Losses And Manage The Process
Even if you bring the vehicle back spotless and clean – with very low miles – before the lease is 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 be documented on your credit history much differently than a traditional repossession.
"If you have 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 repossession, said Griffin, even if 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 lender 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
The first step, which some people forget about until they're in over their heads, 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 can continue to make payments." And according to Tarry Shebesta, president and CEO of Automobile Consumer Services, 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 - and consider the options
If you've talked to your lender and informed them of the situation, and payments remain 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.
Paying it off might sound silly to suggest, but 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 if you can maintain your card payments you won't destroy your credit as you would going deadbeat on the lease.
Buying out – 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 cases where you haven't yet fallen behind on payments it doesn't make much sense. The problem with a lot of lease contracts, said Shebesta, is that even with just a few lease payments left they leave you in an "upside down" financial state; 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 often 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 (Ford Credit, Volkswagen Credit, or Toyota Financial Services, as examples) is often overly optimistic so as to yield lower payments that would in turn move more new vehicles. But 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. When leasing on a subsidized residual it will be much more costly to buy out.
Another option to consider – if only for a select few families with multiple cars – would be to return to the dealership and trade the leased vehicle for a 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 remainder of your lease (often called lease trading) through a company like LeaseTrader is probably the best possibility to get out of a lease without scarring your credit. Even once you find someone to assume your lease, however, it doesn't come free. For instance, there's a charge to use LeaseTrader the first time, and the finance company or bank will commonly charge a fee 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 considering fees due to the DMV and the state.
Again, whether or not it makes sense to pass off your lease 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, some finance companies won't allow you to transfer your lease in the first or last six months, while other 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 – and not you – liable for the rest of the lease.
"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 'out' strategies 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, you should know GAP insurers are being very diligent about fraud.
Damage control and 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 than 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 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, as quickly as possible begin to establish a positive payment history," said Griffin. "It's going to help you recover more quickly." And then, Griffin added, you should begin saving money in order to 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, with credit tight and tolerance for risk low, it's far more significant to stay on credit's good side than it was in the recent past, noted Griffin. If there are tactics to avoid defaulting or becoming delinquent on payments – such as borrowing money from friends or family – then use them. The bank of mom and dad? Priceless.
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