WHAT IS 'Walk-Away Lease'

A walk-away lease is an auto lease which 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.

BREAKING DOWN '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 a 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 compare 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 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.

RELATED TERMS
  1. Bargain Purchase Option

    A bargain purchase option in a lease agreement allows the lessee ...
  2. Capitalized Lease Method

    An accounting approach that identifies a company's lease obligation ...
  3. Open-End Lease

    An open-end lease is an agreement that requires the lessee to ...
  4. Land Lease Option

    An option within a lease contract that grants the lessee the ...
  5. Capital Lease

    A lease considered to have the economic characteristics of asset ...
  6. Net Lease

    Net lease refers to a provision that requires a tenant to pay ...
Related Articles
  1. Managing Wealth

    Why You Should Buy A Car Instead Of Leasing

    While leasing has certain advantages, buying a car tends to save you money in the long run and offers greater flexibility.
  2. Managing Wealth

    When Is Leasing a Car Your Best Bet?

    Leasing a car isn't for everyone. But it's attractive for those who want low initial payments and the ability to get a new vehicle every few years.
  3. Retirement

    Retirees: Should You Buy or Lease Your Car?

    To buy or lease – that is the question. For retirees, access to safer cars, comprehensive warranties and tax deductions may drive up leasing's appeal.
  4. Personal Finance

    Is There a Way to Get Out of Your Car Lease Early?

    For those who no longer want their car for whatever reason, transferring the lease to an interested party can be a particularly appealing choice.
  5. Managing Wealth

    Your Lease Is Up: When Should You Buy The Car?

    In general, the fact that you know the car is to your benefit. Before deciding, compare the buyback price to what the car would go for on the open market.
  6. Personal Finance

    Should You Buy or Lease a New Car?

    Deciding whether to lease or purchase a car depends on a number of factors.
  7. Personal Finance

    Wait on Buying a Pickup (F, GMC)

    Used car prices are dropping everywhere. But if you're in the market for a pickup truck, a good bargain is less of a guarantee – thanks to strong demand.
  8. Insights

    Companies With Big Hidden Debts

    Companies with off-balance sheet debt will be brought to light when new rules come into effect in 2019.
  9. Investing

    Buying a House with Tenants: A Quick Guide

    Before buying a house with tenants, know the risks and responsibilities you're taking on.
RELATED FAQS
  1. How is residual value of assets taxed?

    Find out how and when taxes are assessed on the different kinds of residual value, including the residual value on a leased ... Read Answer >>
Trading Center