What is a Walk-Away Lease?
A walk-away lease is an auto lease that allows the lessee to return the car at the end of the lease period without any financial obligations based on the car’s residual value.
Understanding Walk-Away Lease
A walk-away lease is a common type of car lease which releases the lessee from any financial obligations at the end of the lease, assuming they have satisfied the maintenance and mileage requirements of the lease agreement. The lessee makes an initial down payment plus monthly lease payments over the life of the agreement. They must have the car serviced regularly and are subject to penalties if they exceed an agreed-upon monthly mileage cap. At the end of the lease, the car is returned to the lessor who will then sell the car in an attempt to recover its residual value. The lessee can then enter into a new lease on a second car, often receiving a favorable deal if they remain with the same leasing company.
Pros and Cons of the Walk-Away Lease
The advantages of a walk-away lease, when compared to the purchase of a new car via a loan, lie in the convenience and short-term cost savings of a lease. The lessee will never have to sell the car and is therefore not as concerned about maintenance and resale value. Basic maintenance is required, but the lender typically provides a service plan. Since the lender remains the owner of the car and will recover residual value at the lease’s end, the monthly lease payments tend to be lower than loan payments on a comparable vehicle. For some drivers, the appeal of leasing a new car for a few years, then walking away and replacing it with another leased new car, trumps other concerns about a lease.
From a purely financial point of view, though, most experts agree that a walk-away lease is generally a poor choice. At the lease’s end, the driver has no equity in the car. The initial down payment and monthly payments cannot be recovered unless the lessee agrees to purchase the car at its residual value, then sell it. Hidden or unexpected costs can arise. First, the driver will generally be held responsible for maintenance above and beyond normal wear and tear on the vehicle. Second, a driver who exceeds the monthly mileage cap will be subject to a penalty on a per-mile basis.
Other types of leases may make more sense for some drivers. An open-ended lease generally involves few restrictions on driving but involves some added risk relating to the unknown residual value when the lessee decides to terminate the agreement. A single-payment lease requires one up-front payment and generally results in a better interest rate.