The truth of terminating a car lease
Michael Abramowitz

Car prices are expensive, and an automobile is perhaps one of the worst investments that you can ever make. The majority of cars on the road depreciate as fast as a brand new computer.

Many drivers turn to leasing as an alternative to buying. A deal is made, typically for two to four years, and the driver essentially rents the car at a monthly payment rate that fits his or her budget.

Say a year rolls by, and suddenly you decide that you want to turn in your car before the contract is complete. Is this early termination of a car lease just a bump in the road for your credit report, or is it financial hell on wheels?

The answer depends on the circumstances of how and why you turned your car in and what the conditions were in your original lease.

The good news is that most scenarios will give you good marks and help you maintain a spick-and-span credit report. The bad news is that most often, the house -- er dealer -- always wins.

Scenario 1: Walk away from your lease before it's over

There's one way to make your credit report look as ugly as Jabba the Hut in a string bikini. If you decide to turn in the car before the lease is over -- watch out! In a creditor's eyes, you just did the same thing as defaulting on a loan, says Dave Mooney, spokesman for Equifax, the credit-reporting agency, in Atlanta.

Creditors see that on a report and form the same opinion as if you decided to stop paying your mortgage. "Unless you make a deal prior to the termination, it's a voluntary surrender, which equals 'repo,'" adds Michael Todd, owner of Champion Leasing Group, a luxury car leasor in Woodbury, N.Y. "Your credit report becomes crap."

Defaulting on a lease is a breach of contract, and it has adverse effects on your credit report, agrees Ralph Alvarez, community relations manager for the Consumer Credit Counseling Service of Southern New York. "It acts like a settlement. It's like deciding to pay 75 percent of your debt instead of 100 percent."

Adding to the financial wreck, you're often faced with a stiff early termination fee. You're not only out of a car, but you have less money in your pocket and a damaged credit report. Yuck!

Now that the bad news is out of the way, let's look at how you can turn a car lease in early or terminate at the end of the lease without burning rubber on your credit report.

Scenario 2: Trade in your leased car early and exchange it for a new one

Pretend now that you leased a gas-guzzling Sherman tank a few years ago (more commonly known as a Sports Utility Vehicle or SUV), and you have six months remaining on the lease. Gas prices have skyrocketed, and you want to drive a more fuel-efficient vehicle.

So you trade in that car lease early, either to your original dealer or to a completely new dealer for a shiny new 45 miles-to-the-gallon, environmentally friendly vehicle. The dealer pays off the remaining payments on the car, and you walk away with a new lease on life.

"With rollovers, there's no adverse effect whatsoever on your credit report," Alvarez insists.

But not so fast, lead foot. Although your credit report will show that you've met your obligations completely, you'll still pay for those six remaining payments somehow.

Typically, this will magically appear in the new car lease, says Michael Kranitz, president of Driveoff.com in Denver, and author of Look Before You Lease: Secrets to Smart Vehicle Leasing. Remember that you never owned the car in the first place; you were merely renting with an option to buy.

"The dealer takes it off the customer's hands and just adds [the remaining payments] to part of the new car," Kranitz says. "In your new lease, you'll just pay for part of the old car and the new car at the same time."

He also warns that they'll factor in the subjective excess "wear and tear" clause, where the dealer and you differ on what exactly are normal nicks and scratches.

For example, there's a fender bender that you never fixed. The dealer is going to slap you with a charge for excess wear and tear, often more than what it would have cost you to fix it beforehand.

Plus, there's the excessive mileage clause that if you're over the mileage limit agreed upon per year, you pay per mile what you exceed.

For example, perhaps you're 3,000 miles over the mileage cap of 36,000 miles (12,000 per year on a three-year lease). According to your lease contract, you'll be charged 32 cents per mile. That an extra $960 that's either taken out of pocket or built into the new lease or sale.

But, hey, look at the bright side, your credit report still looks marvelous!

Scenario 3: Buying the car outright at lease-end

If you love the car you leased, you may want to buy it outright. If the residual (payoff) value is less than the resell value of the car, you've hit the leasing jackpot. You pay the price of the car that you agreed upon at the start of the lease to own the car. The car is completely paid off; now it's all yours.

Your credit report looks like gold. Better yet, you can turn around and sell it for more money than you paid or drive it off into the sunset.

"If you exercise the purchase option, look [into the value of the car], to see if it is the smart thing to do," Kranitz suggests. Check both the Kelley Blue Book value and Edmunds.com to see what the car is worth.

If the residual value is more than the car's actual cash value, then turn it in at the lease's end fully paid. Then you can walk away or rollover without any red ink on your credit. Nevertheless, you still have to contend with wear-and-tear and mileage charges.

Scenario 4: Exceptions to the rules

There are some valid reasons to turning in a car early that shouldn't appear on your credit report, states Katherine Sparacino, executive director of the National Vehicle Leasing Association, a nonprofit trade association of independent leasors, in Burlingame, Calif.

Sparacino says situations like divorce, job loss or a move to a state where the lease is void can cause an understanding dealer not to place that nasty plague on your credit report. She says that as long as you are not negligent in paying for the car and in caring for it properly, the dealer will bend and often work out a payment plan that won't affect your credit.

"The consumer has to negotiate with the leasing company," Alvarez says. "If you lose your job ... and you can't make a $100 per month payment, and they agree to $20 a month [over an extended term], it's paid as agreed.

"Under the circumstances, the dealer really wants to work with the client," Sparacino says. "They realize that word-of-mouth is very important. They depend on clients for their livelihood, and referrals are important."

Otherwise, you may refer to the dealer and the leasing company as the big, bad creditors who caused your credit report to crash, your wallet to burn, and your major means of transportation to be walking shoes.

-- Posted: Jan. 21, 2000