Can Terminating a Lease Hurt Your Credit?

What Is a Lease?

• Lease payments consist of both a finance charge and a charge for depreciation to the vehicle. The depreciation charge compensates the leasing company for the value that is lost during the term of your lease. The finance charge compensates the leasing agent for interest they pay to the car dealership for the car.
  
  

Early Lease Termination

• If you suffer a job loss or cannot otherwise afford your car after you have signed a lease deal, you may feel you can turn your car lease in and get a cheaper car. Unfortunately, if you turn in your car before the contracted lease date, you are obligated to pay the remaining monthly payments, plus penalties for any excess wear and tear or damages, plus the cost of excess miles, if applicable. The leasing company can report your unpaid lease payments on your credit report, which can damage your future borrowing power for any kind of loan, whether it's a credit card, mortgage or another auto lease.
  
  

Other Lease Termination Options

• There are companies that will help you arrange a lease swap. You can either exchange a lease with another leasee or take over an existing car lease. You can avoid negotiation, security deposits and other fees going this route. Many leasing companies will allow you to transfer your lease to another lessee for a small fee. This is an alternative to walking away from your lease. Each leasing company has its own fees and regulations, credit check and transfer issues, which may include out-of-state restrictions. Use caution when you use this option, as you may still be held for the payments if the lessee defaults on the loan.
  
  

Dealer Lease End Alternatives

• Most auto dealerships want to retain your business when your lease ends. Some want to get you into another vehicle before your lease ends so that they have an uninterrupted relationship with you. Don't be surprised if you receive a phone call two or three months before the end of your lease offering to end your lease early. Some car manufacturers offer incentives to the dealer, who in turn offer to pay off or absorb a final payment or two with no penalties in exchange for your new lease or purchase.
  
  

Servicemembers Civil Relief Act

• The Servicemembers Civil Relief Act (SCRA) of 2003 allows for auto lease termination for an overseas deployment of 180 days or more. This act applies even if the lease was entered into after joining active duty.