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

End-of-Lease Costs: Open-End Leases

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

Differences between open-end and closed-end leases

Your rights and obligations at lease-end are different in an open-end lease and a closed-end lease. In a closed-end lease, at lease-end you are responsible for the condition of the vehicle (that is, any excessive wear and use). In an open-end lease, you are responsible for the vehicle's value (that is, any deficiency between the realized value and the residual value). Both types of leases calculate an amount of projected depreciation, which becomes the basis for calculating your base monthly payment. The determination of the base monthly payment involves projecting the future value of the vehicle. At the end of the lease term, the actual value may be higher or lower than the projected value. In a closed-end lease, the lessor usually keeps the gain and assumes any loss due to excessive wear or excess mileage. In an open-end lease, you may receive a refund of any gain, and you are responsible for any deficiency. For example, if 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.

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 or receiving any surplus 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 (if you have a purchase option or are otherwise allowed by the lessor) More info
  • Arranging for a third party to purchase the vehicle, if allowed by the lessor. More info
End-of-term charges or refund of any surplus

If you return the vehicle to the lessor at scheduled termination, the lessor will tell you where to return the vehicle. In an open-end lease, subject to the three-payment rule, you are responsible for any difference if the actual value of the vehicle at scheduled termination is less than the residual value stated in your lease (deficiency) (see glossary entry Open-end lease for a definition of the three-payment rule). In most open-end leases, you are also entitled to any refund if the actual value is greater than the residual value stated in your lease. Thus, the lessor may not arrange for inspection of the vehicle unless a substantial residual deficiency is expected. More info

If the lessor arranges for an inspection for excessive wear and excess mileage, it is usually performed by one of four parties: the lessor's franchise dealership, the lessor, 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.

If there is a deficiency and the lessor is relying on the condition report for part of its charges, you may have a right, under state law or your lease agreement, 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 open-end lease ends early, you may have to make a payment (an "early termination charge") to satisfy your lease obligations. This payment may be substantial. 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).

A large part of your 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 usually is a shortfall. As the lease nears its end, this shortfall is generally less because more of your payment is allocated for depreciation.

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. 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. Note that the three-payment rule does not apply at early termination (see glossary entry Open-end lease for information on the three-payment rule).

Options at voluntary early termination. You typically have the following four 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 dealer 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 and either keep the vehicle or re-sell the vehicle and use the proceeds to offset the amount you paid to purchase the vehicle.
  4. Arrange for a third party to purchase the vehicle, if allowed by the lessor.

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 amount 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 deficiency 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 typically applies only in the event of a total vehicle loss through casualty or theft covered by your insurance policy and a determination that the vehicle is a total loss.

Gap coverage does not usually apply to the past-due payments owed for periods preceding the loss or to any fees or costs owed on the lease, such as late fees or parking fines. Also, gap coverage may not apply if you have breached the terms of the 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.

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Last update: May 5, 2003