Leasing a Car on the Cheap

My trusty Volvo wagon served our family well for 13 years, but after 106,000 miles it finally gave up the ghost a few months ago. My wife just completed graduate school, so we weren't ready to commit to a new car payment until we knew her next employment move. I rented a car at first, but at $500 a month, that soon got old.

While exploring different options, I came across a concept new to me: assuming someone else's car lease. Initially I was skeptical, but after considerable research I took the plunge. It took many emails and phone calls and a month-long wait for the paperwork to clear, but I now have a one-year lease on a quality car whose monthly cost is about a third less than the stripped-down model I was renting.

With the caveat that car lease assumption is not right for everyone, here's how the process works:

People need to get out of their car leases for a variety of reasons: they can't afford monthly payments, lose their job, get transferred overseas or simply don't like the vehicle. It's notoriously difficult to escape a lease -- you usually must pay the outstanding balance plus an early termination fee.

One way around this, if your finance company allows it, is to transfer the lease to another party for the remainder of its term. Note: Some lenders, like Honda Financial Services, generally forbid lease transfers, while others set strict limits on when they're allowed during the lease term.

Some leaseholders initiate this process themselves -- say with a friend or relative. But increasingly, people are turning to online lease assumption services like Swapalease.com and LeaseTrader.com. I went with Swapalease.com.

These companies match people wanting to unload their lease (think of them as "sellers") with so-called "buyers" interested in taking over the remainder of someone's lease. Among the potential advantages for buyers:

  • No down payment.
  • You can secure a shorter-term lease, giving you more flexibility.
  • Potentially lower monthly payments than for a new car since the seller's original lease already accounts for much of the car's depreciation.
  • Sellers will generally offer or agree to financial incentives to unload their lease.
  • Newer cars are usually still under warranty.
  • Good opportunity to test-drive a particular model before purchasing.
However, be aware of the many fees involved on both sides of the transaction. For example:
  • Sellers are charged a fee to advertise their vehicle on the websites (generally from $50 to $150), and a transaction fee if a lease transfer is initiated (around $100 to $150).
  • Buyers pay a registration fee to obtain contact information for sellers (around $40 to $80).
  • Some sites charge buyers a transaction fee as well.
  • Buyers must file a credit application with the lender which can cost anywhere from nothing to several hundred dollars; the fee typically isn't refundable if the credit check deems you aren't creditworthy.
  • The leasing company itself will typically charge a lease transfer fee (typically $50 to $600), which is usually charged to the buyer.

Swapalease.com provides a handy tool that lists lease transfer terms and fees for most major leasing companies. However, the fees they posted for my lender were slightly out of date so contact the company directly for current details.

Here are a few additional suggestions and precautions:

  • Inspect the car and note any damage; as the new leaseholder, you'll be responsible if they're not considered normal wear and tear. You may also want to have a mechanic inspect the engine if it's not still under warranty.
  • Ask whether the lender will remove the seller's name from the lease -- some won't. Probably neither party wants their credit tied to that of a stranger.
  • During negotiations, ask the seller to pay the application and lease transfer fees. It doesn't hurt to ask, and you're still potentially saving them thousands of dollars in payments on a lease they don't want. (I set up an escrow account with Escrow.com into which the seller deposited the money until the transaction was completed.)
  • Don't expect a lot of customer service from the swapping website. It's kind of like using eBay, where you do most of the legwork yourself.
  • Make sure there's enough mileage left on the lease to suit your needs.
  • You'll have to pay DMV registration fees.
  • Ask the leasing company whether sales tax applies; and, if the buyer and seller live in different states, which rate applies.
  • As part of the leasing process, your insurance company will need to provide the leasing company with evidence that you have adequate coverage.
  • If you make a deal with someone hundreds of miles away, you may have to pay someone to transport the car.
  • Taking out a lease will impact your credit score; although, if you need to demonstrate your ability to pay off a loan, this can ultimately improve your score -- just don't make any late payments.
  • Know that it can take several weeks or more for the transaction to fully close. In my case, that meant I was on the hook for an extra month's rental fee after I had decided on a car.

All in all, if you're flexible about what kind of car you're willing to drive and not in a big hurry, assuming someone else's lease can be a viable option. Just make sure to do your due diligence.

This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.