The truth of terminating
a car lease
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
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
Scenario 1: Walk away from your lease before it's
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,
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
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.
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
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
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,
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