If you’ve been scrutinizing your budget lately, and considering ways to save money, your monthly car payment is probably an expense you’d be happy to shrink. Fortunately, there are options available to drivers seeking to rein in the cost of car ownership without letting go of their ride. Loan modification is one approach to a…
It’s not easy to end a car lease early, but there are ways to do it without defaulting.
Chances are you signed onto a car lease because it’s often cheaper than financing a car with a loan. After all, the average monthly payment for a leased Honda Civic — the most popular leased car — was $111 cheaper per month than with a loan, according to an Experian report from the first quarter of 2022.
That’s all well and good — until you need to make an unexpected change. The downside of leases is that they can be especially hard to walk away from. It is possible to go your separate ways, but you’ll need to be smart about how you do it. We’ll help you figure out the best plan of action.
How Do Car Leases Work?
First, a quick refresher on car leases. The way car leases work is very different from auto loans. There’s different terminology that might sound wonky and redundant at first, but it has a big impact on how much you’ll have to pay upfront to get out of your car lease early.
A car lease is essentially a long-term rental agreement, with special rules.
When you take out a car lease, you agree to make monthly payments for the length of the contract, which is generally a lease term of about three years. The lessor, the company leasing you the car, (which might be different from the dealership) figures out what they expect the car will be worth when the leaseholder or lessee (you) returns the vehicle at the end of the contract. This is known as the residual value. It’s more or less an estimate, based on depreciation, of what the car’s value will be in the future.
In an ideal world, you’ll drive the car while making your monthly lease payments, and at the end of the lease agreement you’ll only owe certain agreed-upon fees, for example if you exceed the agreed upon mileage limit. The leased vehicle’s realized value (i.e., how much it’s actually worth, as opposed to what the lessor estimated it would be worth) could be very different depending on your upkeep and changes in the market. Either way, you get to walk away scot-free in a closed-end auto lease, which is what most consumer leases are.
But it’s not always an ideal world, and sometimes you need to get out of the car loan early. And when that happens, the car’s residual and realized values can become very important.
Why Do People End Car Leases Early?
People end car leases early for all kinds of reasons.
- They can’t afford the lease anymore.
- Their family grew and they need a larger vehicle.
- They don’t like the car they’re leasing and want a new one.
- They like their car and don’t want to give it up at the end of the lease.
- They moved and the car is no longer practical where they now live.
It helps to think about your own reasons for why you might want to end your car lease early. Depending on your goals, that might steer you toward certain options. For example, if you really like your car and want to keep it, one option to consider is a lease buyout, where you can purchase the car outright.
Your Lease Contract: The Guide for Your Options
Not everyone will have the same options when it comes to ending your lease early. If you want to know for sure what you can do and how much it’ll cost you, your go-to resource is going to be your lease contract.
Under the Consumer Leasing Act, all lessors are required to provide you with a contract that explicitly lines out which routes you can use to end the lease early, and how everything will be calculated.
Can You Get Out of a Car Lease Early?
In short, the answer is yes. You can always get out of a car lease early. Whether or not it’ll pack a big punch to your credit score and your wallet is another matter, however.
Here’s a good plan of action: Grab your lease contract. Go down this list and check your contract to see what’s allowed, what the conditions are, and what the costs will be. Tally up those costs for each option and then voilà! You have your own personalized menu to choose from.
Here are your choices:
Early lease termination clause
Most leases have a provision for early termination of the contract. You can turn in the car early, but only if you pay a hefty amount of fees. Your contract will specify exactly how it’s calculated, and if you’re not sure, you can always call up your leasing agent to ask for an estimate of the payoff amount.
Some contracts specify that you’ll need to make all of the payments remaining on the contract in one fell swoop. Another common method takes the amount remaining on your lease and subtracts the realized value for the car (i.e., how much it’s currently worth). In most cases, you’ll probably also have to pay additional early termination fees on top of that.
The cost to do an early termination can range into the thousands of dollars. Generally, it’ll cost you more to terminate earlier on in the lease than later. In some cases, it could even be higher than just riding out the rest of the lease itself, so you’ll have to consider this option carefully.
One option may be to do an early lease buyout, where you purchase the car outright for a predetermined buyout amount specified in your contract. Most people consider this when their contract ends, but you may be able to do it sooner with an early buyout. You’ll either need to pay for the car in cash, or consider getting an auto lease buyout loan which is available from some lenders.
After you buy the car, you can either keep it or sell it to a private party, depending on whether you like the car or just want a more cost-effective way to get rid of it. If you sell it, you can use the sale proceeds to pay off your lease buyout loan, if you took one out. It’s a lot of shuffling cards around, and depending on those cards, it could be a cheaper way for you to get out of a car loan early or even make money off of the deal, especially if used cars are selling for a premium.
Are you familiar with how renters can sublet their units if they need to move before their contract is up? It turns out you can do basically the same thing with car leases, too.
There are marketplaces out there like Swapalease and Leasetrader that let you essentially create a sort of dating profile for your car lease: details about the car, how much you pay, how much time is left in the lease, etc. If you find an interested party, your lessor will need to approve them and check their credit. But if everyone agrees, you can hand over the keys and the responsibility of monthly car payments.
Keep in mind that just like an apartment sublet, you might still be responsible for the original terms of the agreement. If that person stops paying, trashes the car, or does anything else to lower the vehicle’s value, you could ultimately still be the one responsible.
Like most businesses, the leasing company probably wants your repeat business. One way to do that is by switching out your current lease for a new car lease — i.e., returning your car just a bit sooner.
You might get targeted advertisements for this from your leasing company offering special lease deals if they want your car returned sooner, or you might need to reach out on your own. You could still have to pay an early termination fee in some cases, but it’s possible they could be willing to split that amount among your new lease to soften the impact.
Default on your lease
Finally, the last option is the one that many people fall into if they don’t make any choice at all: defaulting on the car lease. With this option, you simply stop making payments.
Eventually, the same thing will happen as if you stopped paying on an auto loan. Your car will be repossessed, your credit will be trashed, and you’ll probably still be charged an early termination fee anyway. It can wreak havoc with your personal finances.
Choose Your Option Carefully
It’s a good idea to calculate how much it’ll cost you for each of these options in terms of time, money, and whether or not the outcome gets you closer to what you ultimately want. If it’s not a pressing matter, for many people, the best option is to simply ride out the remainder of the car lease and part ways at the end.