70% of International Assignees Break Their Car Lease Early
Have you ever worked with an assignee who had to leave sooner than planned?
Be careful what type of car lease agreement you introduce your assignees to. If your assignees choose the wrong type of agreement, they can end up paying thousands of dollars in contractual costs plus penalties if they need to terminate the lease early.
What if they need to trade in the sports car for a minivan because a baby is on the way? What if they can now afford that fully loaded luxury vehicle instead of the initial compact car? What if they need to leave the country earlier than expected? This isn’t a problem if they have an Open End Lease. If they have signed a Closed End Lease agreement it’s a different story.
There are two types of lease agreements: Closed End Lease and Open End Lease. Closed End Lease is what you normally see advertised on TV or online and offered at car dealerships. Open End Lease is usually only available for businesses as they demand more flexible terms as well as larger quantity.
Open End Lease
Open End Lease agreement is the best option for international professionals (expats) needs, and are breakable at any time. It’s basically the best of both worlds – a bank loan with a residual value, making it possible to terminate / modify the lease at any time.
How to break an Open End Lease:
- Call the Personal Car Specialist and let them know when and where you want to return the vehicle. Vehicles can be returned with a day notice anywhere in the nation.
- The Personal Car Specialist will inform you how much the vehicle can sell for. If accepted, a check or invoice will be sent for the difference. The car can also be sold on their own if they have a buyer who pays more.
- Payment or invoice is issued in 7 – 10 business days. If the customer has moved overseas an international money transfer will made to any destination.
The customer is liable for the difference between the car value at time of sale and sell price:
- The car sells for more; the customer receives a check for the balance
- The car sells for less; the customer receives an invoice for the balance
In average, customers receive $2,000 from the profit on the vehicle at the end of full term (36 months lease).
With an Open End Lease program, the expat customer’s down payment and monthly payments are calculated to put the customer in positive equity at 12 months. This means in theory the assignee could walk away from their Open End Lease agreement after 12 months at zero cost, no matter how long the initial lease term was.
Need to extend the Open End Lease? No problem, the lease can be extended as long as needed.
Closed End Lease
This is the most popular form of lease for consumers in general as it seems attractive up front. But, it comes with some risk involved.
How to break a Closed End Lease:
If the car needs to be returned sooner (70% of our expat customers do), it’s important to have read the small print on the back of a lease contract first.
Most people are very surprised when they learn just how much they actually owe, due to the way the lease company calculates the early termination costs. Customers quickly learn how little of their lease balance has been paid off, even after many months.
There seems to be a common misconception that, to get out of a lease, one simply returns the car, pays some kind of penalty fee and it’s all over. Not true.
Option 1 – Pay up to the leasing company:
Contact the leasing company to find out the early termination payoff and pre-payment penalty fee. The amount owed will be the difference between the early termination payoff stated on the lease agreement and the amount credited for the vehicle so far. This amount is usually substantial and equivalent to making all the lease payments at once.
But how bad can it be to return a Closed End Lease early?
36 month lease, terminated at 16 months, @ $600 a month:
20 lease payments x $600 = $12,000.00 + early termination fee (which could be thousands)
Plus, it may have a negative effect on the credit score.
Option 2 – Transferring the Car Lease:
The assignee can also find another buyer to assume the lease in a “lease assumption” transaction. This transfers the contract and liability to someone else. The assignee should check with the leasing company before pursuing this option because the new lessee may need to meet certain requirements to be qualified to take over the lease. Expect early termination of a lease to have a negative impact on the credit rating.
The existence of a large number “lease transfer/assumption” website services is proof of how very costly it can be to break a Closed End Lease agreement. On these websites, desperate consumers caught in a Closed End Lease can advertise their leased vehicles to hopefully find someone else to take over their lease. Here are a few examples of such websites: leasetrade.com, leasetrading.com, carleasedepot.com, takemypayments.com, pricealease.com or swapalease.com.
The assignee is now spending valuable time looking for another lessee. On average, a marketable vehicle takes between seven and 90 days.
In order to make your lease attractive to potential shoppers, the assignee may also have to “buy down” the payments. For example: if the assignee has 20 payments x $600 left on their lease, to make their vehicle stand out, they might offer to put up $2,000 to effectively bring the monthly payments down to $500. Whether the assignee will have to add incentives depends entirely on how attractive their existing lease terms are, how badly they want out, how sought-after their car is, and how many miles they have remaining on the lease.
If using an online source to assist with finding another buyer, there are costs to advertise the car, as well as a fee to complete a transfer transaction.
The leasing company will most likely also charge a transfer fee. Fees for processing the credit application and transfer documents vary from $100 – $1,000.
Other things to be aware of when transferring a lease:
- If there’s a deposit involved, some leasing companies will simply retain the first deposit, while others return it and ask for a new deposit from the third-party lessee.
- Down payments are also up for debate. If the original lessee put down a large sum, the company may request cash from the new lessee to offset its loss. This works if the monthly payment is low.
- As for liability, some leasing companies hold the original lessee responsible should the third party miss a payment. However, if the third-party applicant has a good credit rating – on par or better than the original lessee – the companies will often transfer all liability, as well as the responsibility for meeting end-of-lease terms, such as excess wear and tear charges.
If you want to ensure that assignees like Michael and many others like him don’t end up with a lease term that is lacking money-saving flexibility, consider our Open End Lease program. ExpatRide created this program with only the expat community in mind, as many times we do not know what life has in store for us.
About msi‘s partner – ExpatRide:
ExpatRide provides expatriates with car leasing and financing of new and used vehicles, any make or model in Australia – Canada – China – India – Japan – the Netherlands – Singapore – Switzerland – the United Kingdom – the United States of America.. We also assist with auto insurance and short and long term car rental.
Jesper Lovendahl is CEO of ExpatRide