Get out from under an auto lease

New online lease-trading services can connect overburdened lessees with customers seeking short-terms deal on late-model vehicles

Preparing to drive his family down to Florida for a vacation last fall, Tony Jenkens took a long look at his Saab hatchback and knew that its time had passed. He needed a minivan.

But his first move, unloading the hatchback, proved to be more complicated than he expected.

The car was leased, with 10 months remaining on the contract. The fee to break free: $1,700, the same as it would cost him to keep the car until the end of the lease term – assuming he wanted to keep a vehicle that his family had outgrown.

Mr. Jenkens felt stuck.

Then, while surfing around on the Internet, he discovered a website that offered lease trading.

Within two days, Jenkens, a Massachusetts software engineer, found a buyer in New Jersey who was happy to pick up a late-model Saab for 10 months, taking over the remaining $170-per-month payments.

Jenkens and his buyer had tapped into an innovative marketplace in which auto leases are bought and sold.

Anyone who has leased a vehicle knows the hassles of getting out. Even if you keep the car for the entire lease, there can be big fees. Drivers face charges for exceeding mileage limits, and lease companies are notoriously picky about fees related to "excess" wear and tear.

Another common charge to watch out for: the "lease disposition fee," due if you decide not to buy the car: Often amounting to several hundred dollars, this fee may be waived by a dealer if you agree to lease another car of the same make.

The cost of breaking free

Those who want to get out of a lease contract early can expect to pay plenty more. The $1,700 Jenkens would have had to pay is a bargain compared with most leases.

The general formula for early termination fees: all the remaining lease payments, plus any difference between the lease-buyout price (residual) and the car's current value, plus the lease disposition fee, plus any wear and tear, minus a little bit of interest on the remaining payments.

Often those numbers add up to as much as $5,000.

Leasing constitutes about 30 percent of today's new-car market, and financially it isn't usually as good a deal as it was a few years ago, when closer to 35 percent of vehicles were leased.

With today's common four-year lease, "anything can happen. You can get a promotion, a demotion, get married, have a family, get transferred," says Ron Joseph, founder and CEO of Swapalease in Cincinnati, an online lease trader. On the other hand, "imagine being able to drive a different vehicle every 18 months," he says.

Four major websites – Swapalease.com, LeaseTrading.com, LeaseTrader.com, and EzOutEzIn.com – have transformed the market by connecting online those who want out early with those looking for cheap payments on an almost-new car for the short-term.

So far, the clientele – both "buyers" and "sellers" – is cutting-edge: mostly 30-something high-tech workers with luxury cars, says Art Spinella, president of CNW Marketing Research in Bandon, Ore., which recently conducted a study on lease trading.

Trading succeeds, so far

Most customers who successfully swap leases are delighted, says Mr. Spinella. "From what we've seen, it works. There doesn't seem to be anything there you can get burned on."

But he concedes that without a couple more years of study, researchers may not come across the pitfalls, because disadvantages may not become apparent until later in the lease term, or after the second lessee finishes the term.

The customer-to-customer transfer of leases has always been theoretically possible. Like mortgages, most leases can be assumed by others, although relatively few lease contracts specifically say so, says Mr. Joseph, of Swapalease.

But the lease-trading market is still in its infancy. Swapalease, which has been on the Web the longest, has facilitated 1,000 trades in its first year and a half in business.

Only a few months ago, finding an employee at a finance company who knew about the transfer process could be hit or miss. Now lease-trading companies walk customers through the process with lease companies. They obtain a form from the lease company to put the new lessee's name on the paperwork and have both "buyer" and seller" sign it.

Often for a fee, they have the customer who wants to assume the lease fill out a credit application from the lease company. And they help facilitate inspections, shipping, and communications between the "seller" and "buyer."

If leasing – with its "residual value" and "disposition fees" – seems complicated, lease-trading is even more so. Many "sellers" with high monthly payments offer incentives that range from several hundred to several thousand dollars to "buyers" up front. For sellers, it's cheaper than getting stuck with the rest of the lease.

For buyers, such incentives "can turn a bad lease into a good lease," says Michael Penfield, founder and president of LeaseTrading.com.

Complications, and strings

Besides incentives, a large downpayment by the original lessee – and the resulting lower payments – can make assuming a lease a good deal. And |the short term remaining on an assumed lease may be easier for a buyer to live with than a new four- or five-year lease.

On the other hand, lessees who don't offer incentives may not get results. LeaseTrading's website is chock full of luxury sedans with payments of $500 a month and no incentives. None of them are marked sold.

Bottom line for sellers: Don't expect to get out of a lease for free unless, like Jenkens, you paid a lot of that money up front when you originally leased the vehicle.

Some leases, such as those written by Bank of America, GE Capital, and American Honda Finance Corp. cannot be assumed. Many, such as GMAC, don't specify.

Others, such as Mercedes-Benz, can be assumed, but leave the original lessee liable in case the new lessee defaults. Steer clear of those leases, says Mr. Spinella. "I wouldn't get into one of these deals with my brother-in-law," he says.

EzOutEzIn offers insurance to cover this liability. The company also advertises a service called REleasing, for those leases that can't be assumed.

The concept is similar to refinancing: A new lease company buys out the old lease and rolls the buyout price into a new lease. But the payments are especially high, so this option may not make sense for many people.

And would-be buyers should be cautious. Unless a lease is really cheap, you don't want to assume the end of someone's four- or five-year lease, when the car's warranty has likely expired. (One of the main advantages of leasing is supposed to be that it makes your transportation expenses predictable. If you have to pay for repairs in addition to lease payments and wear and tear charges at the end of the term, that predictability goes out the window.)

EzOutEzIn and LeaseTrading also provide referrals to companies that offer extended warranty companies. But few buyers take advantage of it, says Mr. Penfield.

If you're considering buying someone else's lease, make sure the original lease has plenty of mileage left and no excessive end-of-term fees. Since you're just assuming the lease, you don't get to renegotiate it.

In addition to fees you'll pay to the lease-swapping service, you'll also face hefty fees from the leasing company to put your name on the lease. At GMAC, for example, this fee is $595. Negotiate with the lease seller to determine who picks up this fee. You must also pass the same credit check that the original lessee did.

Furthermore, make sure the lease provides "gap insurance," or buy it from your auto insurance company. This insurance covers the difference between the car's retail value and the lease payments due in case the car is stolen or totalled. Since the lease company also has an interest in this, "it's pretty hard for this stuff to fall through the cracks," says Penfield.

Getting the vehicle home

Then consider the issue of transferring the vehicle itself. While it's easy to trade paperwork cross-country, getting the car to the new leaseholder can pose problems. Shipping a car cross-country can cost $1,000 to $3,000.

Before taking delivery, experts recommend having the vehicle inspected. Usually, for $60 to $125, a professional inspector (who typically works for banks and car dealers) will provide you with a comprehensive report on the vehicle's condition.

The report includes the cost to bring the car up to excellent condition, which should coincide with what a lease company would charge for wear and tear when the lease expires.

You should also negotiate with the seller any costs to get the car in top shape before assuming a lease. Experts advise having the work done immediately before the repair costs go up, since the lease company will demand that the work be done later anyway. That way you'll only pay for any damage you cause to the car.

In Jenkens's case, the car was pristine, and the lease buyer made frequent business trips to New England, so inspecting the car and driving it home was a snap.

What to know before taking on a new or existing lease

Lease trading offers lessees the opportunity to escape costly contracts early. But for those who assume a lease, understanding leasing fundamentals is key before signing on the dotted line.

Without any downpayment, consumers will pay less per month for a leased vehicle than if they took out a loan of the same term to buy the same car. The reason: A lease doesn't cover the cost of the whole car, only the amount it depreciates before the lease expires.

Since cars depreciate more quickly at first, payments for short-term leases are higher than for long-term ones.

What the car is worth after the lease term ends – the "residual value" – belongs to the leasing company. At that point, the driver owns nothing, even after years of payments.

In leasing's heyday in the early 1990s, manufacturers offered contracts with artificially high residual values on new cars to encourage consumers to sign up. Lease rates soared, with to more than one-third of new cars leaving dealer showrooms under a lease agreement.

But the strategy came back to bite automakers later that decade. They got stuck with the difference between their artificially high residual values and what the cars were actually worth. Few consumers had incentive to buy the cars at the end of the leases at their high contractual prices.

Now lease contracts have "normalized," say experts, with more realistic residuals. Consequently, lease terms have stretched from 2 or 3 years to 4 or 5 years to keep payments in line with consumer expectations.

By lengthening terms, the lessee pays for the slower depreciation in the second few years of a car's life as well as the steep depreciation the first year or two. The end result: lower monthly payments, but higher early termination charges.

Another way consumers can reduce monthly lease payments is with a large downpayment – called a "capitalized cost reduction" in leasing language.

That's what makes assuming a lease attractive: You get the advantage of the original purchaser's down payment without laying out any cash yourself.

Before making any assumptions ...

With automakers no longer inflating the residual values of their newly leased vehicles, leasing isn't as good a deal as it once was. As a result, more people may be looking to get out of their leases early.

That can make for great deals for careful "lease buyers."

Still, when assuming someone else's lease, it's important to read the fine print. Some points to consider:

• Make sure the mileage on the leased car isn't so high that you'll exceed the maximum allowable mileage before the term expires. You'll pay for every mile you drive after that. Usually lessees pay about 35 cents for each mile they travel over the limit.

• Know when the leased vehicle's original warranty expires. One of the primary advantages of leasing is that you know up front how much you'll pay for the life of the lease. The warranty helps protect you from unexpected repair bills.

• Find out about any "disposition fee." With many leases, this is a fee you will have to pay just to walk away from the car at the end of the term.

• Verify that the gap insurance transfers along with the lease. This insurance covers the difference between what the car is worth and what you've paid if the car is stolen or totalled. Gap insurance is often rolled into the lease payments. If not, make sure you're covered.

• Negotiate who will pay the lease-transfer fee to the leasing company. Usually the lease seller pays this fee, but if the lease is a really good deal, it may be worthwhile for the buyer to pick it up.

• Determine who will pay for any wear-and-tear charges on the car when the lease expires. These often fall into the buyer's lap, but can be negotiated with the seller.

• Negotiate the cost of shipping the leased vehicle to you. The costs to ship a car cross-country can reach $1,000. Buyers and sellers may choose to split this cost down the middle.

The major lease traders at a glance

For a fee, a handful of online firms now offer advertising for lease sellers and help in preparing documents for a lease transfer. Services sometime include referrals for auto-inspection services and shipping, though costs of those services are not covered.

Company: Ezoutezin.com

Cost for lease sellers: $59.95 fee for 60-day ad, plus $89-$289 "processing" fee, depending on length of lease term remaining.

Cost for lease buyers: $24 application fee, credited to buyer upon assumption of lease (buyers are credited an additional $10 for each referral they make that leads to an application).

Company: LeaseTrader.com

Cost for lease sellers:

$39.95 advertising fee (per month).

Cost for lease buyers: $24.95 application fee; an additional transfer fee of $149 does not cover any additional fees charged by lease-financing Company.

Company: Leasetrading.com

Cost for lease sellers: $39.95 advertising fee deductible from a commission of 5 percent of remaining lease payments due when buyer passes credit application.

Cost for lease buyers: No fee. Buyer must negotiate with seller, however, to cover credit application and lease-transfer fees.

Company: Swapalease.com

Cost for lease sellers: $49.95 for 45-day ad (renewable for unlimited time for additional $24.95); $95 "success fee" due when transfer is initiated.

Cost for lease buyers: $24.95 registration fee (covers all processing).

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