Car leases have a reputation for being just one step shy of immortal. They can seem to last forever, and when you’re in, you’re in – at least for the duration of the lease term. But that’s not actually the case. You can always get out of a car lease early if you’re willing to pay the early buyout price.
Leases aren’t forever. They’re just designed to make sure you think long and about your current lease before that last payment comes due.
The Advantages of a Car Lease
People began leasing vehicles – or at least modes of transportation – long before anyone ever dreamed of engine-powered wheels. Americans regularly leased horses and carriages back in the 1700s, but it wasn't until 1952 that an American company conceived of the idea to lease cars. Fast forward to the 1990s, and leased vehicles were a booming industry, eventually representing 22 percent of the automobile market in 2008 before the recession hit.
There’s a lot to be said for the concept of leasing rather than buying. Monthly payments are typically less, and it can require less money up front, resulting in a brand new vehicle that many consumers might not otherwise be able to afford.
Monthly payments are typically a matter of financing the difference between the car’s value at the inception of the lease contract and its anticipated depreciated value at the end of the lease term, plus fees and interest. This can be far less expensive than financing the entire value of a car for purchase.
Read More: New Car Guide: Buying vs. Leasing
How Does a Car Lease Work?
A car lease is a binding contract between a consumer and an automotive manufacturer, although leasing companies can offer leases as well. The lessor lets you drive the car for a period of time, usually two to four years. In return, you make a down payment, commit to making regular monthly payments during that time, and follow a prescribed maintenance schedule. Regular maintenance keeps the leased car in nice shape so it can eventually be sold at the end of the lease term, either to you or to another consumer.
You’re also limited to how many miles you can put on the vehicle during this time – so forget about taking a cross-country tour. Remember, your monthly payment is based on the vehicle’s likely depreciation over your lease term. You’re obligated to return the vehicle at the end of the lease, but you have the option to buy it instead.
When you sign the contract, you’re making a legal promise to keep the car for the designated lease term. The terms for how you can be relieved of that obligation should be clearly spelled out in the lease agreement.
Read More: Requirements for Leasing a Car
Why You Might Want to Get Out Early
Life isn't stagnant, and any number of things might make you rethink this arrangement after you sign the lease contract. First and foremost might be your financial situation. Maybe something has occurred in your life so that you simply can no longer afford a car payment. Or maybe you’re leasing a sweet little sports car that can’t accommodate the car seat you now need for your new baby. Another scenario is that you’ve decided you just don’t like the car.
You can terminate the lease in any case, but you’ll most likely have to negotiate a minefield of potential financial penalties. The Federal Reserve Board points out that “early termination” of your lease means ending it for any reason – voluntary or involuntary – before that final lease payment comes due and is paid. Lease contracts don't include “what if” clauses, such as that you can get out of the contract if you lose your job or have a baby, or especially if you start driving the vehicle only to think, “Ugh, I don't like this after all.” Penalties will kick in regardless.
The Disadvantages of Ending a Lease Early
Penalties might be severe when you end your lease early, or they might be more lenient with little hassle. You might possibly have to pay the entire balance of the least contract when you return the vehicle to the dealership – all the monthly payments that remain – and this can mean taking a real financial hit if you’re in the first year of a three-year contract.
Worse, you might be required to make a cash payment to cover the difference if the car’s resale value is less than the remaining lease payments. You might also have to pay something toward having the car spiffed up for resale, particularly if it’s suffered any damage while you’ve been driving it.
Additional financial penalties can apply as well, on top of satisfying the lease term. They might include an extra “early termination fee,” which CARFAX indicates could be a few hundred dollars. This might be representative of the difference between resale value and your remaining lease payments, however, so it’s possible you could avoid paying both that and an additional termination fee.
You can also probably count on your credit score dropping considerably because breaking the lease contract will show up as a negative entry on your credit report.
How to End a Lease Early
Take a good look at your lease contract if you feel that you have no choice but to end your lease early. It should clearly explain how to do so and the financial hit you’ll take. In fact, federal law – the Consumer Leasing Act – requires that the contract must specifically explain how you can get out early and how the lessor will calculate how much you’ll owe if you do. Consult with a financial professional if you’re still unsure because there might be terms included in the lease that you just don’t understand.
Gathering some information in advance can go a long way toward telling you how much this is going to cost you. You’re probably very familiar with what your monthly payment is, but nail down exactly how many more months you have to go on your lease, as well as how much you’d have to pay for the car if you decided to purchase it at the end of your lease. You might find this referred to as its “residual value” in the lease contract.
Now subtract your remaining payments from that value. Ideally, you won’t come up with a negative number, because this difference will most likely have to be paid, too, if you do. Don’t neglect to add in any fees you would have been expected to pay at the end of the lease even if you didn’t terminate early. These will still have to be paid as well.
You might also want to contact your dealership to find out if you can simply roll your termination penalties into a new lease on another vehicle – like maybe one that will accommodate a car seat. Your monthly payment will most likely increase exponentially, but at least you’ll be able to get out of the lease without a considerable amount of money coming out of your pocket all at once. You might have more luck with this option if you’re close to the end of your lease term because your termination fees will probably be less in this case.
- J.D. Power: How to End Your Lease Early
- CARFAX: 5 Ways to Get Out of a Car Lease Early
- MarketWatch: Four Ways to End Your Car Lease Early, Without Losing Your Shirt
- Your Auto Advocate: How to End Your Car Lease Early (Explained by a Car Dealer)
- CarsDirect: Terminating a Car Lease Early
- Federal Reserve Board: Keys to Vehicle Leasing
- Experian: What Is a Car Lease and How Does It Work?
- zCarLease: History of Leasing in the Automotive Field
- Consumer Financial Protection Bureau. "What Should I Know About the Differences Between Leasing and Buying a Vehicle?" Accessed April 12, 2020.
- Merriam-Webster. "Lease." Accessed April 12, 2020.
- AARP. "To Buy or Not To Buy." Accessed April 12, 2020.
- Consumer Financial Protection Bureau. "What is a Manufacturer Suggested Retail Price (MSRP)?" Accessed April 12, 2020.
- LeaseGuide.com. "Capitalized Cost – Cap Cost." Accessed April 12, 2020.
- Autotrader. "Leasing a Car: Can You Negotiate the Price?" Accessed April 12, 2020.
- Edmunds. "The 'Residual Value' of Leasing." Accessed April 12, 2020.
- Federal Reserve. "Keys to Vehicle Leasing: Future Value." Accessed April 12, 2020.
- LeaseGuide.com. "Money Factor—Explained." Accessed April 12, 2020.
- Federal Trade Commission. "Financing or Leasing a Car." April 12, 2020.
- Federal Reserve. "Keys to Vehicle Leasing: End-of-Lease Costs: Closed-End Leases." Accessed April 12, 2020.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.