What Happens When My Car Lease Is Up?

Proper preparation is just as important at the end of a lease period as it is in the beginning. You need to start early, because regardless of whether you have a closed-end or an open-end lease, a vehicle inspection about 30 to 90 days before the lease expiration date is the first step in the wind-down process. At that time, the dealership or leasing company reviews lease-return procedures and options. These include a lease buyout, turn-in, trade-in, extending the lease or selling the car to a private party. The best decision for your situation depends on the lease type, the vehicle’s condition, its residual value and current economic conditions.

The lease inspection notes any damage and differentiates between normal and excessive wear and tear. You’ll get a copy of the inspection report and estimates for any necessary repairs. If there’s time between the inspection and lease expiration dates, you may save money by having your own mechanic make the repairs before the turn-in date. Ask for a short-term lease extension if making the repairs on your own is more cost-effective but you need more time. According to Mary Hellen Owen of Toyota Financial Services, about 10 percent of lessors make this request.

The most common end-of-lease options are to purchase the vehicle, return it or use it as a trade-in. The type of lease is a significant factor in making a wise choice. In most cases, if the vehicle’s purchase price is higher than its current market value, walking away by turning it in or using the vehicle as a trade-in are wise choices. However, additional costs associated with a closed-end lease may make purchasing the vehicle a better idea.

Consumer leases are typically closed-end agreements. With a closed-end lease, also known as a “walk-away” lease, the dealership assumes responsibility for depreciation and any reduction in value due to normal wear and tear. In exchange, you agree to limit mileage to about 12,000 miles per year or pay excessive mileage charges of 10 cents to 20 cents per mile, as well as paying for damage and excessive wear and tear.

An open-ended lease is more common for business or fleet vehicles. This arrangement doesn’t limit mileage during the lease period, but does place all financial responsibility for depreciation on you as the lessee.

Although both types give you the same lease-end options, returning an open-ended lease vehicle can be a costly decision, especially during an economic dip. Unlike with a closed-end lease, where there are no additional charges unless you exceed allowable miles or return the vehicle in poor condition, with an open-ended lease, you are responsible for paying the entire difference between the residual value -- the projected market value determined at the beginning of the lease -- and the vehicle’s current market value.

Selling the vehicle is an option if you can sell it for more than its residual value. There are two options for a selling a leased vehicle:

• Purchase the car and then sell it to a private customer
• Use the dealership as a reseller

According to All Things Car, using the dealership as a reseller is often easier and more cost-effective. For one thing, you can’t sell a vehicle you don’t legally own. This means you’ll have to purchase and retitle the vehicle before listing it for sale. However, when the dealership is the intermediary, you bring in your customer and the dealership buys out the lease and sells the car to your customer at the agreed-upon price. The profits exceeding your residual are then given to you as a down payment on your next car or as a check.