This is the seventh of nine articles in our Blog Series Is Leasing Really Fleecing? In our previous segment, we addressed some of the pitfalls in leases. Perhaps the biggest pitfall is the high costs of early termination charges.
If a new vehicle is financed or purchased and a consumer can no longer afford the payments or no longer needs a vehicle, the options are straight-forward. The car can be sold or traded-in for another vehicle. If the car’s value exceeds the loan amount, then the consumer must either pay the difference or have the excess added to the cost of the new car or truck.
The situation in a lease is far more complicated. If a consumer wishes to terminate a lease early, or if a leased car is repossessed for non-payment, the consumer is responsible for any past-due payments and for unpaid taxes. If the vehicle is repossessed, there will also be a repossession charge. Additionally, leases provide that the leasing company can impose an “early termination” charge.
The early termination charge is determined according to a formula contained in the lease. These formulas are complicated and difficult for most consumers (and many attorneys) to understand. Different leases utilize different formulas. Most of the formulas, however, are intended to compensate the leasing company for any depreciation to the vehicle that has not already been included as part of the lease payments already received.
In practice, however, these formulas often result in early termination charges that severely penalize the consumer. The charges can total thousands of dollars, and they are sometimes as high as the cost of all of the remaining lease payments. These charges are so high, because the formulas usually include a determination of the vehicle’s value at the time of the early termination. The lower that value, the greater the amount of depreciation for which the leasing company will seek compensation.
Vehicles turned in early are frequently sold at auction, especially if vehicle has been repossessed for nonpayment. Auction sales frequently bring in less money than the vehicle’s true value. If the sale price is lower, then the greater the amount of depreciation under the lease formula will be. That will result in a higher early termination charge.
Federal law requires that early termination fees must be reasonable in light of the actual loss to the leasing company caused by the early termination. In our view, many early termination fees charged by leasing companies are not reasonable. For example, if the early termination charge is equal to the value of the remaining lease payments, then the leasing company is getting a windfall. the car is returned at an earlier time, when its value is higher than it would be at the end of the lease term.
Consumers who default on their leases also do not have the same repossession rights as consumers who finance their purchases. In Connecticut, for example, consumers have the right to receive advance notice of the repossession or, if no advance notice is given, they can usually be reinstated in their contracts. Banks and finance companies must usually also credit accounts with the vehicle’s fair market value and not just credit the low auction re-sale value. Consumers who lease their vehicles do not enjoy these protections.
Consumers who have financial problems or who unexpectedly can no longer use a vehicle can face very significant charges. A consumer’s options include paying the charges, purchasing the vehicle and then attempting to sell it, or finding someone to take over the lease payments (which some leasing companies will permit for a fee). Many consumers may try to avoid the charges by trading the vehicle in to a dealer, but that frequently results in overcharges in the next car purchase or lease.
Early termination charges in leases are one of the biggest pitfalls in leasing, and consumers who are concerned that there may be changes in their circumstances should think carefully before leasing a car or truck.
In our next installment, we will look at whether there are any advantages to leasing.