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Up-Front, Ongoing, and End-of-Lease Costs

End-of-Lease Costs: Closed-End Leases

Note: This section refers only to closed-end leases. In an open-end lease, your rights and obligations are different.

End-of-term options

At the end of a lease, you do not own the vehicle. The specific provisions of your lease agreement govern your options at lease-end.

Your options may include the following:

  • Returning the vehicle and paying any amounts owed More info
  • Arranging for the repair of any damage and returning the vehicle More info
  • Extending the lease, if allowed by the lessor More info
  • Leasing the vehicle for a new term (re-leasing), if allowed by the lessor More info
  • Purchasing the vehicle. More info
End-of-term charges

If you return the vehicle to the lessor at scheduled termination, the lessor will tell you where to return the vehicle and arrange for inspection of the vehicle. End-of-term vehicle inspections for excessive wear and excess mileage are usually performed by one of four parties: one of the lessor's affiliated dealerships, the lessor itself, a private appraiser, or an auto auction. It is in your interest to be present at the vehicle inspection. After the inspection, you should carefully review the vehicle condition report and discuss any questions you have with the person doing the inspection. You may be asked to sign the condition report to acknowledge that you have received a copy. If you have any questions or concerns, you may want to note them on the report.

Under state law or your lease agreement, you may have a right to dispute the condition report. In the event of a dispute, some lessors also offer you the right to choose a third-party appraiser acceptable to both you and the lessor to make a binding assessment of excessive wear.

End-of-term charges may include

Early termination

Early termination means that the lease ends before the scheduled termination date for any reason, voluntary or involuntary. More info

The federal Consumer Leasing Act requires the lessor to state

  1. The conditions under which a lease may be terminated early and
  2. The amount, or description of the method for determining the amount, of any penalty or other charge for early termination.

Other early termination topics covered in this section are

Reasons for the early termination charge. If your lease ends early, you may have to pay an amount (an "early termination charge") to satisfy your lease obligations. This payment may be substantial. The earlier you end your lease, the greater the early termination charge is likely to be. The early termination charge is typically the difference between the balance remaining on the lease (lease payoff amount) and the amount credited for the vehicle (realized value of the vehicle). Suppose, for example, that your lease early termination payoff is $16,000 and the amount credited for the vehicle is $14,000. Your early termination charge will be $16,000 minus $14,000, or $2,000 in this case.

A large part of the early termination charge is due to the fact that the market value of a leased vehicle declines more quickly at the beginning of the lease than at the end of the lease. In the early part of the lease, the amount you pay for depreciation does not fully cover the amount the vehicle actually depreciates. So if you end the lease early, there will usually be a shortfall between the depreciation you have paid and the actual depreciation. As the lease nears its end, this shortfall is generally less because more of each payment is allocated for depreciation and the vehicle usually depreciates more slowly later in the lease. In a closed-end lease, at the end of the lease, if you have made all of your payments, you are not responsible for any shortfall between the depreciation you have paid and the actual vehicle depreciation. Examples

Calculation of the early termination charge. The calculation of the early termination charge is set forth in the lease. Usually, the amount credited for the vehicle you've leased will be the actual wholesale price received for the vehicle or a wholesale value established by some other means, such as an independent appraisal. The early termination charge may include such charges as a vehicle disposition fee and taxes. In virtually all cases, you must pay other amounts owed, such as late charges, past-due monthly payments, and parking tickets. Some lessors also charge an additional amount, usually a fixed dollar amount, to reimburse their costs of early termination and the portion of their initial costs that would have been covered by the remaining rent charge. The earlier you end the lease, the greater the early termination charge is likely to be.

The charge may be up to several thousand dollars. Thus, because early termination may be expensive, you may want to select a lease term for the length of time you plan to drive the vehicle instead of choosing a longer term (to get a lower monthly payment) with the idea of terminating the lease early. Some consumers may choose a lease term equal to the loan term they were considering without understanding the difference if they terminate early. Although a lease has a much lower monthly payment than a loan with the same term, the lease early termination charge will be much greater.

A variety of different formulas are used to calculate the early termination charge. The most popular is to charge you for the adjusted lease balance, less the credit for the vehicle. The adjusted lease balance is calculated by reducing the adjusted capitalized cost each month by the depreciation portion of the monthly payment. In this way, the adjusted lease balance is reduced each month similarly to the way the adjusted loan balance (loan payoff) is reduced each month by the principal portion of the payment in a loan or credit agreement.

Several methods are used to allocate the base monthly payment to depreciation and the rent charge. The most popular method is the Constant Yield (Actuarial) method. More info Example Another is the Rule of 78 method. More info Example

Options at voluntary early termination. You typically have the following three options at voluntary early termination:

  1. Return the vehicle to the lessor and pay any early termination charges due.
  2. Trade in the vehicle to a third party (such as a dealership or leasing company). If the proceeds exceed your lease balance, you can apply the excess to your lease or purchase of another vehicle or receive the excess in cash. If there is a shortfall, you are responsible for the deficiency. If you buy or lease another vehicle, you may be able to include the deficiency as part of the amount financed or the gross capitalized cost of the other vehicle.
  3. Exercise any early termination purchase option, re-sell the vehicle, and use the proceeds to offset the amount you paid for the vehicle.

Substitutions and subleasing.You may have a fourth option at voluntary early termination: subleasing the vehicle. Upon your request, the lessor may approve the substitution of a new lessee, who then takes responsibility for completing the lease. Generally, this person will have to meet the same credit standards that you met. You will remain responsible for meeting the terms of the lease, including all payments, so it is important to find a responsible person to assume your lease. In some states, it is illegal to sublease vehicles.

Some subleasing businesses charge a fee to find someone to assume the lease. They may or may not find someone. These companies may advise you not to inform the lessor "so they can't turn you down." However, the vehicle may be given to an unqualified party, or the vehicle and the subleasing company may disappear, leaving you responsible for the missing vehicle. Some states have outlawed this type of subleasing business. You may want to check with your local consumer protection agency about any subleasing company you are considering.

Early termination charges if your vehicle is stolen or totaled. When your vehicle is stolen or totaled, your deficiency or surplus will be determined by comparing your lease payoff with the settlement proceeds from your insurance company. If there is a surplus, you may receive a refund. Check your lease agreement to determine the refund policy. However, in most cases there will be a deficiency.

Many lessors offer gap coverage to reduce or eliminate your early termination charges when the early termination is caused by your vehicle's being stolen or totaled. There are two types of gap coverage. One is a waiver by the lessor of the gap amount after an insurance casualty loss. The other is a contract with a third party, which may be an insurance company, to cover the gap amount. With either type of gap coverage, you are usually responsible for your insurance deductible and any other amounts deducted from the insured amount of the vehicle by your insurance company. Gap coverage applies only in the event of a total vehicle loss through casualty or theft and a determination that the vehicle is a total loss.

Gap coverage does not usually apply to past-due payments you may owe for periods preceding the loss or to any other fees or costs you owe on the lease, such as late fees or parking fines. Also, gap coverage may not apply if you have breached the terms of your insurance policy or the lease. The lessor's waiver typically will not apply in the event of a loss through forfeiture or confiscation by a government agency. You may be responsible for continuing your monthly payments until the lessor receives the insurance proceeds.

Next: End-of-lease costs: Open-end leases

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Last update: May 5, 2003