Trying to exit your lease early

Ron Doron
1198915200

A closed-end subsidized lease can be a wonderful thing because it lets you drive a car for much less than it would cost under regular situations. Take my 2006 Honda Ridgeline RT Truck. The MSRP on it was over $28,000, but I was able to lease it for $1,500 down and $279 per month. This is a terrific rate that is made possible by Honda Motor Credit's involvement to buy down the rate and artificially increase the residual value.

There are two parts to a lease. The first is the rent on the part of the vehicle that you are using and the second is the rent on the part of the vehicle that you are not using. The sum of the two payments is equal to your monthly lease payment. At $28,000, my Ridgeline lease should cost around $500 per month. But by reduding the money factor or interest rate, discounting the cost of the truck, and pumping up the residual rate, Honda is able to offer a much cheaper lease payment.

So far so good, but here's where it gets unfavorable for the consumer. 2 years into my lease, I want to get out of it. However, I owe $20,500 and because of poor resale value, the dealer only wants to offer$16,500, so I would be $4,000 upside down. And that hurts.

Let's examine how a new vehicle got $4,000 behind it's perceived value in less than 2 years.  For starters, the Ridgeline has been a slow mover so Honda discounted it and subvented the lease.  This put more Ridgelines out there and now there is more supply than there is demand.  A dealer will only pay you what he can buy a similar vehicle for at auction, and they want to make at least $3,000 profit on every used car.  

The $4,000 difference from what I owe versus what it's worth, suggests that I should have been about $160 more per month or $439.  And if that was the lease program being offered by Honda, there is no way I'm renting a base Ridgeline for that kind of money.

So here is my advise if you are going to exit your lease early:

  • Minimize your exposure.  Get a shorter lease and on a vehicle that will hopefully retain its value better than the Ridgeline.
  • Look for leases that focus on reducing thetransaction price or the CAP Cost rather than those with discounted money factors or inflated residual cost.
  • Try to lease from a manufacturer that allows you to transfer a lease.  Honda does not allow you to transfer so my only option right now is to sell.
  • Be patient and always try to sell it on your own first.  That's usually worth at least $2,000 in your pocket.