The pros and cons of ending a lease

It can make sense to get out early but the new lessee must watch out for some curves.

Bert DeSouza enjoyed driving his 2006 Subaru Legacy GT wagon until a job change that allowed him to work at home meant his expensive Subie would languish in the garage.

It was time to part company — a formidable challenge when you’re leasing.

“I had 11 months left on the lease at $606 per month. Returning it early would have required paying a penalty in the thousands,” says DeSouza.

Like a growing number of Canadians, DeSouza advertised his car and his lease on a lease-takeover “remarketing” website and found a willing second lessee.

To help grease the transaction, he offered the new lessee $1,250 cash and paid the transfer fee (about $400); in return, DeSouza was released from his contractual obligations.

“For the original lessee, it represents an alternative to the tyranny involved with early lease termination where it sometimes feels like the dealer and automaker want a pound of flesh,” says George Iny, president of the Automobile Protection Association.

“Typical cost for an early lease return runs in the $2,500 to $5,000 range — with $10,000 not unheard of for a prestige vehicle or for someone ending a lease in the first year.”

At the same time, used-car shoppers are turning to lease-takeover services to find late-model used cars and trucks as an alternative to scanning the classifieds and looking online for used vehicles to buy.

“Savvy people are using the site,” says DeSouza. It’s especially useful if you’re looking for luxury vehicles or hard-to-find specialty models, he notes.

Mississauga-based Leasebusters.com pioneered the lease takeover concept in 1990 and dominates the market today, but there’s no shortage of competition. Rivals include Easyrelease.ca, Leaseexperts.ca, LeaseTakeOvers.ca and Ontarioleasing.com, among others.

All the sites function the same way: vehicles and leases are advertised to draw present and future lessees together; all that seems to differ is the service fee. Leasebusters charges $295, while newer firms tend to undercut that price to build traffic.

In reality, anyone can advertise their lease in any classified listings, such as Craigslist and Kijiji, often at no cost.

It’s no secret leasing will get you into a new automobile at a relatively low monthly payment, since you’re essentially renting the car. A lease takeover is attractive because the original lessee may offer a cash incentive — it’s cheaper than paying the penalty to the dealer — that effectively reduces the monthly payment for the takeover party.

And because the new lessee is taking over an existing contract mid-term, there’s no down payment and the financial commitment is shorter.

“If you like to change models often or are interested in an impractical vehicle like a Mini or convertible, this is a great way to get the bug out of your system,” Iny suggests.

“There’s rarely any upfront fees, so if you have a job but no cash, this can be a good way to acquire some wheels without the upfront money associated with leasing. We have seen savings of $100 per month or more compared to leasing the same vehicle from new.”

“Some lease takeovers can be quite attractive with either lots of kilometres available for the remaining term, or cash incentives to take over the remaining payments,” points out automobile broker Mark Derry.

Canadians who lamented the loss of lease programs by Chrysler and General Motors turned to Leasebusters to find their next contract, albeit for a late-model car or truck rather than a new one, says Leasebusters spokesperson Tom Liebman.

“Up until a couple of years ago, the proportion of new vehicles leased in Canada was close to 50 per cent,” says Liebman. The number has since plunged to around 14 per cent, according to Maritz Research — a sum that suggests there are plenty of consumers who are suffering leasewithdrawal symptoms.

Extended-term purchase financing is supposed to be the leasing alternative — thanks to “car mortgage” terms of 84 and even 96 months (eight years!) — but growing traffic on sites like Leasebusters is evidence there’s still lots of interest in leasing.

“I’m getting a lot of calls about lease-takeovers, but I always tell people to do their homework,” says Mohamed Bouchama, executive director of CarHelpCanada.com and host of CP24’s AutoShop.

The pitfalls are numerous.

Not only do consumers have to scrutinize the used car they’re contemplating, but they also have to dissect the contract they’re assuming. A lease written in 2007 will have some distinct advantages and disadvantages compared to one minted today.

“Consumers think they’re getting a great deal when they see the incentives people are offering, but sometimes they’re not so great,” says Bouchama. “The lease rate was 4.9 per cent a few years ago; now it’s as low as 0.9 per cent.”

“The main factors that influence a lease payment are price, interest rate and residual value. All three of these have been fluctuating greatly over the past few years,” warns Derry.

“For example, residuals are 5 to 10 per cent lower on many new cars right now versus a couple of years back. But interest rates and some prices are lower now.”

Lower residuals (the vehicle’s market value at the end of the lease) means lessees have a higher monthly payment to cover steeper depreciation costs — but that’s mitigated by lower lease rates today.

Automobile leases also have a mileage limit that, once reached, introduces an expensive surcharge, typically 10 cents per kilometre. Consumers need to know how soon the punishing surcharge kicks in.

“I think one of the best times to look at a lease takeover is in extreme mileage situations. If you are a high-mileage driver that drives 35,000 km or more per year and you can find someone that may have lots of kilometres left on their last year or two of a lease, it can be a very attractive opportunity,” says Derry.

By definition, a lease takeover is a late-model, one-owner vehicle — but it still warrants close inspection like any used car. In fact, more so.

“Get the car checked out and okayed by the lessor, as per an end-of-lease inspection, to ensure you are not going to be penalized for pre-existing damage,” advises Iny.

The original dealer can help out in this regard. DeSouza says his Subaru dealer was extremely accommodating by doing the mechanical inspection, arranging plates and bringing the two lessees together.

There’s good reason for all that goodwill: Subaru gains a new client mid-lease, and the old client may be talked into a new one.

In fact, automakers and dealers have come to embrace the lease-takeover business model; industry giant GMAC even inked a strategic alliance with Leasebusters in 2006.

For used-car shoppers, the prospect of taking over a lease and then financing the vehicle at term end seems like a convoluted way to acquire a set of wheels. Our experts agree it takes a lot of number crunching to determine if the takeover route will yield a late-model car cheaper than simply finding it on a used-car lot or for sale privately.

“Typically, if the car/lease is less than two years old, it is often better to just look for a used car to finance. If it has depreciated more — it’s further into its lease and there is a decent cash incentive — then it could be an attractive option,” says Derry.

DeSouza’s experience was so positive he’s now considering taking over the lease of a Ford Flex to replace his family’s other Subaru.

“It’s cheaper than financing a new or used one,” he asserts.

Our experts suggest there are so many variables involved, each takeover lease is as unique as a snowflake — which makes comparing the potential savings a complex puzzler worthy of a Cray supercomputer.

“In the end, you are basically buying a used car with more paperwork that you have to be careful about,” concludes Derry.

Itching to try a lease takeover?

Our experts have some advice:

• Ensure the lease is close-ended, whereby the leasing company is guaranteeing the buyback price. Otherwise, you could be required to pay the difference between the residual price and the vehicle’s market value at lease end.

• When you are transferring your lease to a second lessee, make sure the leasing company absolves you of all obligations (get it in writing). Until recently, some companies tried to keep the first lessee on the hook for any costs should the second lessee default, but that stipulation has largely disappeared today.

• If you’re shopping for a lease takeover, try asking for a bigger cash incentive. About 80 per cent of listings are resolved in 60 days, but many lessees are keen to close the deal quicker out of need.

• Many luxury and specialty models are leased rather than purchased, and they will often show up on lease exchange sites before they’ll show up on used-car lots.

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Jun 16, 2010

MARK TOLJAGIC

The Toronto Star