What Is a Lease Balance?
The 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.
- The 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.
- Lessees also have the option of buying the vehicle during their lease, known as a lease buyout.
- Comparing a car's actual value to its residual value will help determine if a lease buyout is financially prudent.
Understanding a 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 the responsibility for 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.
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.
A new car depreciates by 15% to 20% each year. Cars lose value as soon as they're driven off the lot.
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.
How to Calculate a Lease Buyout
In a lease, you will usually have the option of buying the car; this can be when the lease is over or during the lease. When considering buying out your lease while in contract, you will need to calculate the lease buyout.
There are a few steps in calculating a lease buyout. The first step is determining the car's residual value. The residual value is set when the lease starts so it will be available in the documentation of the car. This is the estimated value of the car when the lease ends.
After finding the residual value, you will need to find the actual value of the car. Depending on how much the car was used, the actual value may be higher or lower than expected. There are many online resources to find the car's actual value.
If the actual value is higher than the residual value, you're getting a good deal, and buying the car may be a good option. If the residual value is higher than the actual value, it may not be in your best financial interest to buy the car. You can try and negotiate the price with the dealership. Other costs to keep in mind include fees and taxes when completing a lease buyout.
Example of a Lease Balance
John bought a car two years ago and the early lease termination payoff has been set at $50,000. In the two years since, John has paid $20,000 on his lease, meaning there is $30,000 left on his lease; his lease balance. If John decides to terminate the lease early, then he would have to pay the remaining balance due of $30,000 to terminate the lease.
Depending on his financial situation, as well as his vehicle needs, will determine if this is the right move for him. Granted, paying off $30,000 and not making use of the vehicle is a hefty price tag. In addition, there may be some charges, fees, and taxes associated with the disposition of the vehicle.
What Is the Difference Between the Residual Amount and the Payoff Amount?
The residual value of a vehicle is the future estimated value of the vehicle when the lease is over. The residual value is determined when the lease starts. The payoff amount is the amount that you would pay for the car if you were to buy it before the lease is over. The payoff amount includes the residual value of the car as well as the amount you've already paid on it.
What Is the Adjusted Lease Balance?
The adjusted lease balance is the adjusted capitalized cost of the lease. The adjusted capitalized cost is the initial balance used to calculate your monthly lease payment. The adjusted lease balance is the amount left on your lease.
Do I Need to Put Money Down on a Lease?
Depending on the lease, you may or may not have to put money down. For cars, this is usually not required. This may also depend on your credit rating and will also affect your monthly payments. If possible, it is usually recommended to put some money down as to reduce your monthly payments.
What Happens to My Lease If I Crash the Car?
If you crash your car, you still owe the amounts on your lease. Your car insurance should cover the damages and repairs, but an accident does not get you out of your lease.