Dodging Your Lease

Updated on July 10, 2008.

WHEN BRUCE WILSON HEARD a friend was selling her 1987 Porsche 911 Carrera, he couldn't resist the opportunity to buy it. "I've had my eye on it for many years," says the 54-year-old Milwaukee cardiologist. The only problem: He already had four cars in the garage and one of them, a 2004 Mazda RX8, had nearly two years left on its lease. Understandably, Wilson didn't want to park the car and have to make payments for the remaining lease term.

Then a friend told him about Swapalease.com, a web site that facilitates lease transfers by posting ads from drivers who want to get rid of their leases. Within a week, he was contacted by an interested driver in Indiana and once Swapalease.com completed all the paperwork with the leasing company, Wilson drove to O'Hare airport where car keys changed hands. "I was surprised at how easy the whole thing was," he says. "I was completely unaware that there would be a service that allows you to get out of your lease early. I thought you just had to suffer with your lease until it was over, or pay a huge penalty."

Terminating a lease early can be an expensive proposition. Typically, the leasing company will require you to pay all remaining monthly payments, and sometimes even tack on interest or additional fees, according to Tarry Shebesta, president of Automobile Consumer Services. That could add up to thousands of dollars. But thanks to web sites like Swapalease.com and Leasetrader.com, consumers willing to get out of their leases early can find others looking to acquire a lease with a shorter term — and forego the hefty penalties.

As leasing has regained popularity — 18.6% of all car sales were leases in June 2008, compared with 16.2% two years earlier, according to auto information web site Edmunds.com — so have the lease-transfer web sites. Last year, Leasetrader.com facilitated 35,000 lease transfers, according to its founder, Sergio Stiberman. This year, he projects approximately 45,000 total transfers. At Swapalease.com, transactions this year are at 5,000 so far, a 20% increase compared with 2007.

Here's how the web sites work: Lease holders post an ad online for a set fee ranging from $49.95 to $149.95 (adding a photo gallery is another $10), with details about the car and the specifics of the lease, including payments, remaining term, miles already driven and so on. Lease seekers, on the other hand, pay a registration fee ranging from $35 to $80. At Leasetrader.com, the fee includes a credit check, which lease seekers must pass before contacting lease holders. Swapalease.com leaves the credit check to the leasing companies. It allows lease seekers to contact lease holders only after they've paid the web site's registration fee.

Once the transfer is completed, the buyer and seller could pay a success fee of $95 to $150 to the web site. The leasing companies also charge a transfer fee (typically paid by the buyer, but could be negotiated), which can be as low as $50 with Toyota and Lexus, or as high as $600 with GMAC, according to Leasetrader.com's Stiberman. The web sites assist both buyers and sellers to complete the paperwork required to do the transfer. They can also refer a car-inspection service if the buyer lives in a different state, as well as transporting the car to the new location, at additional cost.

Sounds like a win-win situation? For some, it is. But there's a catch: Many lenders don't allow the original lease holder out of legal responsibility for the lease payments if the new lease holder doesn't make them, according to Shebesta. Why? Well, they would much rather consumers bought new leases so they could move cars off the lots. In the industry, this is called an equity transfer, while a lease transfer where the original lessee does not retain liability is called a lease assumption.

"We don't necessarily want to encourage this type of trade," says Honda Financial Services spokesman Chris Martin. "We don't have a great interest in facilitating [lease-transfer] agreements." Additionally, holding the original lease holder on the hook is a "second line of defense" if the person who assumes the lease bails out on the payments, he explains.

That's also one of the reasons why consumers seeking to acquire a lease may be subject to credit requirements that are stricter than those seeking to get a new lease, according to Jesse Toprak, executive director of industry analysis at Edmunds.com.

According to Daimler Financial Services — another company that doesn't let the lease holder out of responsibility — lease agreements are structured based on the original lessee's credit worthiness, and the company does not have "the opportunity to restructure the transaction to be solely in the name of the new individual." (Translation: The lease payment was determined at least in part based on the original lessee's credit and once it is transferred, the payments cannot be recalculated based on the new lessee's credit.)

Also on the list of companies that won't let you off the hook are the financial arms of Porsche, Subaru, and Volkswagen, according to Shebesta.

Notably, Swapalease.com has a deal with Mercedes-Benz where the web site's customers are allowed to do a lease assumption, according to Scot Hall, executive vice president of operations at Swapalease.com.

Still, a number of companies don't even allow lease transfers, a trend whose direction is hard to pinpoint, depending on whom you ask. Honda Financial Services, Infinity Financial Services and Ford Motor, which includes the credit and financing arms of all its subsidiaries, including Ford Motor Credit, don't allow the transfers. According to spokeswoman Meredith Libbey, Ford does allow for someone to be added to the original lease, which in effect works like an equity transfer since the original lessee isn't relieved of legal responsibility for the payments.

Finally, those considering buying into an already existing lease should keep in mind they could be facing a tax situation if the original lessee lives in a different state. Some states, including Arkansas, Illinois, Maryland, New Jersey and Texas, collect sales tax on the lease upfront, while others, like Alabama, Florida, Georgia, Louisiana and Utah, collect sales tax on a monthly basis, Shebesta explains. (For a full list, see the sidebar.)

Taxes are factored into the monthly payment regardless of whether it is charged monthly or upfront. But if the lease originated in a state where tax is paid upfront and the new lessee is in a state that collects tax monthly, for example, they will end up paying tax to both states. That's because the upfront tax is factored into the monthly payment, and more tax will be added on by the state where the new lessee lives. It's a murky situation, Shebesta says. In many cases, "there's even a problem getting a straight answer from the [local] DMV" on what the new leaseholder is supposed to do. Refunds from the original state are a slim possibility, he says.

If you can swallow those setbacks, lease trading may be just as sweat a deal as it sounds.