What Does Lease Balance Mean?
Lease balance is the amount of money that a customer owes under the terms of a vehicle lease contract. The lease balance becomes important in two main situations. The first is in the event that a car is stolen and not recovered, is totaled in an accident, or is otherwise destroyed. The second situation is if the lessee wants to terminate the lease early for any other reason.
- Lease balance is the amount of money that a customer owes under the terms of a vehicle lease contract if the vehicle is damaged or the lessee decides to terminate the lease early for some reason.
- Depending on the situation, different methods, such as gap insurance or paying out of pocket, are used to make up for the shortfall in costs.
- Lessees may still be on the hook for lease balances, if they did not negotiate for a lease offer that satisfies the amount outstanding.
Understanding Lease Balance
A vehicle's fair market value is often different from its lease balance, because vehicles depreciate quickly at the beginning of their life but lease payments are flat over the life of the agreement. When a lease agreement is terminated for any reason, the lease's early termination payoff provision is used to calculate the lease balance and determine how much the lessee must pay to end the agreement. This amount could be several thousand dollars.
In the first situation, insurance will cover only the vehicle's fair market value, and the lessee must make up the difference through gap insurance or by paying out of pocket. In the second situation, the lessee cannot simply turn in the car to the dealer and walk away; they must pay the difference out of pocket or avoid the payment by transferring the lease to another party.
Some leasing businesses also offer the option of transferring responsibility of the lease to another third party through a sublease. The lessor can find another party for the sublease and they remain responsible for making all payments associated with the lease. Or the business may charge a small fee to match you with another, similar lessor. Subleasing is illegal in some states.
Responsibility to Pay off a Lease Balance Can Persist After a Trade-In
If the lessee wants to trade in a leased vehicle to a dealer or a leasing company and the proceeds from the transaction exceed the lease balance on the vehicle, they could use the excess funds towards the purchase or lease of another vehicle. If the lessee seeks an early termination of their lease and resells the vehicle, they could use those proceeds to cover the lease balance plus any additional fees due at the termination.
It is possible that efforts to trade in or resell the vehicle may leave the lessee with a lease balance that is still owed on the vehicle if they did not negotiate for an offer that would have satisfied the amount outstanding. The lessee would then still be accountable for the remaining lease balance, which may be due immediately under the terms of early termination. Depending on the terms of the lease, it might not be possible to trade in or resell a vehicle unless the entire lease balance, plus early termination fees and administrative charges, are paid in full at the time of the transaction.
In the event that the lessee does not stay current on their payments and the vehicle is repossessed, they will in all likelihood be responsible for the outstanding lease balance as well as penalties and fees.
Example of Lease Balance
Suppose the early lease termination pay off has been set at $50,000 while the amount paid so far is $25,000. If the person leasing the vehicle decides to terminate the lease early, then they would have to pay the remaining balance due of $25,000 to terminate the lease. This is a fairly simple calculation. In reality, early termination charges are much more complex and include charges for vehicle disposition and taxes.