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David Bach The Automatic Millionaire

David Bach, The Automatic Millionaire

The Best Lease May Be Someone Else's

by David Bach

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Posted on Monday, August 27, 2007, 12:00AM

A few months ago, I was having dinner with a friend who had just gotten a new Range Rover -- a really sharp vehicle that's fully loaded and fun to drive. As it turns out, he didn't buy or lease it directly from a dealer. He took over someone else's lease, and saved a fortune in the process.

My friend's experience led me to think about the other side of the deal -- what the benefits were for the person looking to get out of the lease.

Suppose your personal circumstances change -- you lose your job, have a baby, or experience another life event that affects your financial situation. What options do you have for getting out of an expensive lease that may be costing you hundreds of dollars a month more than you can afford?

Why Auto Leasing Is Popular

Approximately 17 million cars are leased every year in this country. That's about one-third of all new cars sold, according to CNW Marketing Research.

Leasing is popular because of lower upfront costs, and it gives many people the ability to drive a nicer car than they could otherwise afford. In fact, about 90 percent of the new luxury cars you see on the road are leased.

When you lease a car, you're basically renting that car for a specified time period -- usually 24 or 36 months. But keep in mind that once you're in a lease, the automaker and car dealer are no longer in the equation. It's now an agreement solely between you and the financial institution holding your lease. And believe me, they don't have any big incentive to let you out of the lease early or take it back.

Break Your Lease without Going Bust

When you're faced with the challenge of too-high car payments, you have a few choices. First, you can simply break your lease agreement, but it's going to cost you.

The problem with breaking your agreement is that you're not only responsible for the remaining payments on the lease, but you'll also be hit with very high pre-penalty and transaction charges that can potentially add up to thousands of dollars.

Next, you may be able to negotiate down the pre-penalty charges if you assure the dealer that your next car purchase will be through them. But at the end of the day, you'd probably end up paying more than you would if you were to continue with the lease.

You might also consider buying out your lease and then selling the car. This only makes sense if you're able to sell your car for more money than the final buyout amount. Call your leasing company and ask them what it would cost to buy out your lease, and check out the current market value of the car at Kelley Blue Book online.

Selling Your Lease Instead

Here's a different option I highly recommend you consider: Find someone (like my friend) who can take over your lease.

First, make sure your lease agreement allows for a lease transfer. Then go to a web site like LeaseTrader.com or Swapalease.com, two big players in the auto-lease transfer business. (For the record, I don't earn a penny from either company. I simply want to share some great resources with you.)

Both sites match leaseholders who want out of their contracts with people willing to take them over. The process isn't free, but it's surprisingly affordable considering your alternatives.

The Web Makes It Easy

Here's how the sites work for lease sellers:

1. Post an ad for your vehicle: On LeaseTrader, posting an ad costs $79. Swapalease has a range of fees from $49 to $149, depending on how prominent you want your ad to be.

2. Field offers and negotiate: Once your ad is up, you'll be contacted by prospective buyers. You have the freedom to negotiate the terms of your deal and, depending on how fast you want to sell, can always sweeten the pot with price concessions or offer to pay the buyer's transaction fees.

3. Finalize with your leasing company: Before you hand over the keys to your buyer, you'll need to contact your leasing company and change the name on the lease. Leasing companies typically charge $200 to $400 to do this. You'll want to ensure that not only your name but also your obligation is completely gone from the leasing agreement once the deal is finalized.

4. Pay remaining fees: LeaseTrader charges $149 to both the buyer and seller for a successful transaction. Swapalease has the seller pay an additional $95 when a transaction is made, but only if they chose the cheapest listing option.

Here's how the sites work for lease buyers:

1. Browse the ads: You can browse general listings for free on both web sites, but for serious buyers who want to contact sellers and start negotiating, each site has a comparable membership fee of about $40 for two months.

2. Contact sellers and negotiate: After you sign up for a membership, you're able to contact sellers. Assess the cars you're interested in the same way you would when buying any car, and also pay special attention to mileage. (If you drive a lot, you'll want to avoid leases with few miles left.) Negotiate a fair price, but remember that other buyers may be willing to pay the full payment listed.

3. Review the lease agreement: Don't forget to read all the fine print. There may be additional charges from your new leasing company if you don't buy the car at the end of your term. Some leasing companies don't allow lease transfers, and some only allow one transfer. So after you take over a car, you may not be permitted to pass it along.

4. Finalize with the seller: You'll want to have the car inspected by a professional. Once you've agreed on the price and understand the leasing agreement, the entire process typically takes about three weeks.

Keep in mind that your credit rating will be considered when taking over a lease, and remember to talk about delivery of your car if the seller isn't nearby. Delivery could cost several hundred dollars -- but who pays for it is, of course, negotiable.

So, as a buyer or a seller, you might expect to pay a total of about $400 to $600 to take advantage of this service. However, depending on which side of the deal you're on, and the conditions of the car and lease in question, you may be able to negotiate your cost way down.

It's Your Choice

Is leasing a smart financial move in the first place? The answer depends on your individual circumstances, your personal needs, your driving habits, and the terms that are offered to you.

In general, there are two categories of drivers for whom leasing makes sense: those who drive fewer than 10,000 to 12,000 miles per year (because the per-mile overage costs on most lease contracts make them cost-prohibitive for anyone driving more), and those who drive exclusively for business (because the entire lease payment may be tax-deductible).

As for buying a new car, I believe it's the worst investment you could ever make; the minute you drive it off the lot the value drops by about 35 percent or more. But my intention isn't to proclaim that leasing is better than buying. Again, that decision is different for everyone -- and I'll cover it in greater detail in a future column.

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  • Yahoo! Finance User - Monday, September 10, 2007, 4:37PM ET  Report Abuse

    • Overall: 1/5

    Awful article... Suggesting that people get leases is awful, the margins that the bank makes on leases is huge (which translates to your interest rate in effect). Why not use your own capital? If you can't afford a depreciating asset (like a car/boat) then don't buy it.

  • David - Sunday, September 2, 2007, 6:49PM ET  Report Abuse

    • Overall: 1/5

    Car leases are for idiots who want to look like "big shots". (To themselves, of course, but I guess they think it impresses others.) Do the math: you pay almost as much as you would on a car loan, and end up with nothing after a few years. Buy used!

  • bernard - Saturday, September 1, 2007, 7:22PM ET  Report Abuse

    • Overall: 1/5

    not playing with a full deck. get the facts straight before you cause financial hardship to some innocent reader.

  • CHRIS - Friday, August 31, 2007, 11:38PM ET  Report Abuse

    • Overall: 1/5

    You are saying sometimes a dealer will "take care" of you if you buy or lease your next vehicle from them. The dealer has nothing to do w/ what you owe or the value of the car. The dealer has already been paid in full for the initial transaction and has no bargaining power with the leasing agency or "bank" to negotiate a payoff. After you enter a lease or, for that matter, loan agreement your payment obligations have nothing to do with the dealer. Only the"bank". The bank has no interest in lowering the payoff on a depreciating item. The idea of leasing is to let the bank take the risk of over-depreciation by setting a "guaranteed value" or residual after so many years and miles w/ average wear and tear. It is misleading to say a dealer has that kind of responsibility or bargaining power. All negative equity is either rolled into your next lease or purchase if you don't offset it w/ money down. Leasing is similar to taking a cab or limo to and from home. The more you travel, the more you pay. The more expensive the vehicle you ride in or drive, the more you pay. Mileage is adjustable in most leases and, logically, lowers the residual value.15k mi/yr leases are fairly common now because the payment is typically not much more than 12k. If you have to break a lease because of affordability, you likely don't have the means to pay the monthly payment, let alone, the remaining payments. Why would you be able to afford the cost of advertising on a website w/ no guarantee your vehicle will sell while your credit is crushed while you wait?!!

  • Skip - Friday, August 31, 2007, 6:52PM ET  Report Abuse

    • Overall: 1/5

    crock of cow dung - call GMAC, Chrysler Credit, or FMCC and they'll laugh at you if you try and transfer your lease to someone else - besides........it's STUPID even if you can do it!!!!!!

  • DENNIS - Friday, August 31, 2007, 6:42PM ET  Report Abuse

    • Overall: 1/5

    You should do a little more research before writting an article you know little about. In 30 plus years in the car business i have found very few things you described as true. Stay away from any lease buyout. Why do you think leases are so hard to get out of?? Because of the inequity you have. Why would you want to put yourself in that position on purpose by buying out someone bad position???

  • Mike - Friday, August 31, 2007, 6:28PM ET  Report Abuse

    • Overall: 4/5

    I tried one of the leasing companies mentioned in this article to sell my lease. It was expensive to list, a lot of hits, but that was all.they guarantee nothing, and it was money lost in retrospect. I was skeptical and should have followed my gut instinct-sell the car outright, if possible. The best alternative is to list your car for sale on www.cars.com or www.autotrader.com. Get the payoff, list that, upload photos and list. You may have to paydown the pay off to match the value of the car. (I did not have to) I SOLD the car in two weeks! First person who looked it it, bought it outright. The car was less than one year old. Although I lost money, I preserved my credit to the extent I was able to be easily approved for a used car. Turning a leased car in early can be both expensive and a major blemish on your credit rating. Don't do it. If you do trade the car in for a new car not leased, be advised you will be upside down and the total payments will be very high - and the finance company will require a large downpayment from you. This was my PERSONAL experience, others may have better success through one of the companies listed. I am only suggesting alternatives to consider before listing. (A disclaimer)

  • Yahoo! Finance User - Friday, August 31, 2007, 6:13PM ET  Report Abuse

    • Overall: 1/5

    GET A REAL JOB INSTEAD OF TRYING TO MAKE PEOPLE FEEL BAD ABOUT BUYING A NEW VEHICLE. FOR ALL THE PEOPLE WHO SELL VEHICLES FOR A LIVING SAYING THINGS LIKE DON'T BUY A NEW CAR( WHO DO YOU THINK YOU ARE). LET THE PEOPLE MADE UP THEIR ON MINDS ABOUT BUYING VEHICLES

  • Delvin - Friday, August 31, 2007, 6:06PM ET  Report Abuse

    • Overall: 3/5

    i think it need to be put in simpler term,for the average person who need to lease a motor vehicle.

  • alberte - Thursday, August 30, 2007, 5:54PM ET  Report Abuse

    • Overall: 3/5

    The usual stuff about taking over leases, but if you are the one who wants to get out of the lease and assign it to someone else, this statement " You'll want to ensure that not only your name but also your obligation is completely gone from the leasing agreement once the deal is finalized." is erroneous. I don't know of any leasing company or bank that does not keep the original lessor on the contract.

  • Yahoo! Finance User - Wednesday, August 29, 2007, 3:54PM ET  Report Abuse

    • Overall: 4/5

    Good article! But why exaggerate... "As for buying a new car,...;the minute you drive it off the lot the value drops by about 35 percent or more." Do you really think a 30k car, it's worth 20k or less once you drive it off the lot or drive few thousand miles!!!! Hey, I'll buy such car in a hurry.

  • sari - Wednesday, August 29, 2007, 8:40AM ET  Report Abuse

    • Overall: 4/5

    I saw information about leasetrader on CNN. It said that some of the ads on the site are actually posted by car dealerships so if you're looking for a bargain, short term lease don't be fooled into signing up for a full term lease with a dealer. As always, buyer beware!

  • michelle - Wednesday, August 29, 2007, 8:28AM ET  Report Abuse

    • Overall: 4/5

    Regardless of whether leasing is smart or not - a lot of people lease their vehicles. If you're in a lease now but wish you werent then this sounds like a good option. 4 stars.

  • kathie - Wednesday, August 29, 2007, 8:22AM ET  Report Abuse

    • Overall: 5/5

    I've actually used leasetrader.com and give it a thumbs up. I lost my job almost 6 months ago and right away cut back on all my expenses. I was leasing my acura and paying about $450 a month - not a huge amount but too high in my situation. I transferred the lease using leasetrader and took out a small car loan for a used honda. Now my payments are about $150 a month. I also wound up saving on my car insurance premium too.

  • Yahoo! Finance User - Wednesday, August 29, 2007, 12:59AM ET  Report Abuse

    • Overall: 1/5

    Misinformation: driving a new car off the dealer's lot doesn't drop its value 35% or more. Especially with imports. What more, you never consider a car purchase an investment. Who is this guy, anyway?

  • PhillyFLA - Wednesday, August 29, 2007, 12:54AM ET  Report Abuse

    • Overall: 2/5

    Chris B - I'm glad you aren't handling my finances because your math and logic are way off. You aren't up nearly the 12.1 to 15.1 you think you are. First of all, to assume you are earning that much would assume that you are earning interest on that money AND you have a free car that you would have otherwise been financing. Once you actually get the car you spent that money (therefore not accumulating interest anymore) . You can't have a car and have both forms of earnings/savings. If you want a simplistic look at it, you are saving 7.5% but lost out on money that could have been gaining 5-10% based on your choice of investment so you are probably breaking even. To illustrate further, assuming you were buying a $15,000 car that you already had saved up for and were deciding to finance vs buy. If you financed it at 7.5% for 48 months, you would pay $2,408 in interest or $17,408 on that car. At 5.05% savings interest that $15,000 you kept in the bank would be worth $18,349 after that four years. Thus you would be up about $1,000 after after four years if you financed. Add that to the $15,000 you left in the bank and you would have a sum of about $16,000. If you just spent the $15,000 up front, you'd have lost that money and the compounding interest but saved $17,408 in mo payments over four years. If you collected compounding interest on each of those monthly payments you would have been making you would be left with $19,246.84 after four years. So yes, you would be up about $3,200 in net gains. A $3,200 gain over 4 years is only about a 5% return. Not the 12 to 15% you thought. You could argue that the $15,000 you saved up only cost you $13,000 to do so, by $2,000 of it being interest. I guess you could argue that could have cheaper auto insurance as well by owning the car outright instead of financing. However, you could also argue that you could invest that money in stocks and yielded 10% instead of 5.05% while financing. Bottom line is you aren't making anywhere near 15%. If you are in savings, it's closer to 5%. If you are in stocks, it could be 0% you are "paying yourself".Bottom line is you aren't making anywhere near 15%. If you are lucky, it's 1 to 2% tops.

  • Jim - Tuesday, August 28, 2007, 11:14PM ET  Report Abuse

    • Overall: 1/5

    This guy is wacked I would like to buy that year old car 35%That mean you could buy a Camry right off the lott for under 15k. Then he says pays the fee's unless you want to buy it out what he doesn't explain is that you can still sell the car it has a payoff just like a loan. He could also get a price from a buyer and if he owes more pay the difference if he wants out early this writer doesn't have a clue on leasing. The biggest reason people lease is to protect their value at the end if they owe more than the cars worth give it back to the lease company if they owe less keep it or sell it. A lease and a buy have nothing different when it comes to a payoff a vehicle doesn't know wether it is owned or lease if deprecitate either way.

  • Mike - Tuesday, August 28, 2007, 11:02PM ET  Report Abuse

    • Overall: 4/5

    Article is interesting. I am interested in a market which would match the used car buyer (the person that likes to buy a car after it has been driven for 3 years or so, many who have posted comments are such people) with the leasee who is near the end of the lease term. I think there is a market for vehicles coming off lease with residual values less than dealer retail. Seems like most leases I have looked at have residuals pretty close to "trade-in" value while buyers of the vehicle will be paying "dealer retail" after the vehicle is returned to the leasing company and makes it out to the dealer lot. There should be a way to cut out the margin the dealer is getting on the vehicles coming off lease (which, by the way, is one of the reasons there are VERY good lease deals from time to time). Anyone aware of such a market (web based or otherwise)? Very interested in peoples opinion of such a market.

  • beidler n - Tuesday, August 28, 2007, 9:24PM ET  Report Abuse

    • Overall: 1/5

    A better way to go is a newer used car that's already depreciated (% will vary, certainly no where near 35% on an 07-06 Lexus). I bought a 5 month used 07 STI with 3600 miles for 27K that MSRPd at 35K. A smokin deal that's only 22% depreciated.

  • Yahoo! Finance User - Tuesday, August 28, 2007, 9:21PM ET  Report Abuse

    • Overall: 2/5

    Had to get out of a lease on a car. Had a friend who wanted to take over the lease. I was not able to remove myself from the lease committment, we could only add my friend to the lease so we were now both responsible for payments. It worked out fine. He took the car, drove it and made payments til lease end and turned in the vehicle, but if he didn't I was still on the hook.

  • Yahoo! Finance User - Tuesday, August 28, 2007, 8:51PM ET  Report Abuse

    • Overall: 1/5

    This guy David the author failed to mention 1 very small detail: to see the car you want they have to dig into your credit... Not mine.

  • Yahoo! Finance User - Tuesday, August 28, 2007, 6:51PM ET  Report Abuse

    • Overall: 1/5

    This story said nothing to help buyers understand which leases are a good deal to take over. Many times the original leasee negotiated poorly and the payment is much higher that a good negitiator could get on a new lease with no money down. The stroy also failed to mention that one good reason to take over a lease is if you want to buy the vehicle for something close to wholesale value when the lease it up. Since many of the vehicles on the sites the author mentioned already exceed the mileage limit, this is the only way taking over the lease on such a vehicle makes sense.

  • Yahoo! Finance User - Tuesday, August 28, 2007, 5:20PM ET  Report Abuse

    • Overall: 1/5

    A lot of ignorant statements, like "the value of a new car drops by 35% or more the minute you drive it off the lot." Name one make & model of a 2007 automobile that you can buy used today where the average price will be 35% lower than than the original price. If that were true, everyone would be buying 1 year old used cars, And besides, why would anyone care if the value dropped when they drove it off the lot? People buy cars to drive them, not sell them the next day. For the general public (i.e., non-business), leasing a car is for suckers - you're essentially "buying" more car than you can afford. That's why dealers love to lease cars - they make a lot more money off them. Most people that I know who have leased cars wanted to get rid of them before their lease was up.

  • Frank J - Tuesday, August 28, 2007, 5:08PM ET  Report Abuse

    • Overall: 2/5

    Buying a new car isn't the worst investment you could make. Buying a used car that strands you in the middle of nowhere is far worse.

  • Wes - Tuesday, August 28, 2007, 5:08PM ET  Report Abuse

    • Overall: 4/5

    First off, I got rid of my lease through swapalease.com, worked out great. Cost me a few dollars in fees, but it was worth it. Wife had a baby so she took my SUV, and I didn't want to drive her little coupe. Second, my family has owned a car business for over 25 years and I can tell you without a doubt, that for many people, leasing is a better use of your money, period. First off, all things being equal, it costs more money per month to finance a car then to lease it. That's the first premise. Take time value of money and see what investing that difference in payments gets you over the course of your lease. Guarantee you're better off through the lease route. As a finance guy and I've ran the numbers a million times. You are better off using that money investing somewhere else. He's right, in my book, cars aren't even an investment at all. Owning a car is the equivalent of stuffing your money under a mattress, it's not working for you.

  • Yahoo! Finance User - Tuesday, August 28, 2007, 4:32PM ET  Report Abuse

    • Overall: 3/5

    I agree with author that buying new car is bad investment. The 35% drop figure may not be true but at least don't cite Honda vehicle. Taking over a lease seems like a sucker bet to me. Most leasers are over their head and probably have below average credit rating (or they would have just bought it). Assuming someone's lease is worse than buying a new car - you don't get to get the exact car you want but yet you are paying a very high price for it.

  • Yahoo! Finance User - Tuesday, August 28, 2007, 4:14PM ET  Report Abuse

    • Overall: 2/5

    The only three cases when you save with this approach will be: 1) when seller have gotten excellent deal from the beginning and you are taking advantage of that great deal; 2) when seller has decent deal AND gives you an incentive, effectively lowering your monthly payments; 3) if you drive a lot and vehicle has high unused miles left, something like 2,000 miles per months. One serious drawback - both sites are full of sleazy dealers offering "deals" with hidden costs, such as $5,000 down payments. It used to be that only individuals were listing the deals...

  • John - Tuesday, August 28, 2007, 3:31PM ET  Report Abuse

    • Overall: 2/5

    No No No. He lost me with "As for buying a new car, I believe it's the worst investment you could ever make; the minute you drive it off the lot the value drops by about 35 percent or more". Makes me think this guy is getting a kickback on his advice to lease. The very best idea is to buy a new car at little over the dealer price, pay cash, and keep it for 10 years or more. Take care of it and your annual cost of ownership will be excellent. Leasing is a sure way to triple your cost per mile. And taking over someone else's lease sounds very risky to me if you don't know the leaser and how they were driving and maintaining the vehicle. But hey, if you have money to burn and love that almost-new car smell, then who am I to stop you?

  • Yahoo! Finance User - Tuesday, August 28, 2007, 3:22PM ET  Report Abuse

    • Overall: 1/5

    I fail to see how this is a good deal for the buyer, unless the lease was very heavily manufacturer subsidized or has many more miles left than the avg. per month at purchase or the seller includes a big cash incentive to do the deal, which is doubtful because the seller needs to save $. Why buy/lease a depreciated (used) asset at full price? Why would anybody want to do this? The deal seems even worse if you have great credit, or simply better credit than the current lease holder, which might be likely. On the 4-5 yr leases, you may even be paying up taking on warranty risk in last couple of years. If you want to lease a 3-yr old vehicle for 2 years, you would be WAY better off getting in on a fresh transaction based on the current value of the vehicle, NOT the as new price. An $80K car new might be worth $45K after 3 yrs, and you can get into a new lease on the used car based on the lower price with a smaller depreciation component. There are tons of 2-3 year old cars coming off lease sold at auction each week--buy one wholesale with a broker then lease it.

  • Rodolfo - Tuesday, August 28, 2007, 3:20PM ET  Report Abuse

    • Overall: 5/5

    I used Leasetrader to get rid of my lease, I had to get rid of a situation where i had leased a car for my girlfriend, very smooth transaction, it took about 2 weeks to get rid of my car, overall great experience.

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