When Transferring Into Or Out Of a Car Lease, Beware the Pitfalls

With home foreclosure rates rising and economic volatility the norm, it's easy to understand why more people might want to get out from under a $400-per-month car lease that stretches on for two or three years.

Companies such as LeaseTrader.com and Swapalease.com offer such services, connecting people who want to get out of a lease with those eager to get a deal on a short-term arrangement, but consumers should proceed carefully before paying hundreds of dollars for a lease transfer.

The idea of escaping a lease is gaining in popularity. LeaseTrader.com says it expects to handle 35,000 transactions this year, up from about 20,000 in 2006.

"Since the auto payment is typically consumers' second-highest monthly bill, if you can't control your mortgage from going up, this is certainly an excellent way of controlling" monthly expenses, said John Sternal, spokesman for Miami, Fla.-based LeaseTrader.com.

Some consumers might be trying to rein in their monthly budget: Smaller cars are gaining favor among those seeking lease vehicles, with about 15% of prospective buyers on LeaseTrader.com seeking a small car, up from 2% a year ago, Sternal said.

Lease-transfer services help consumers get out of contracts that are otherwise pricey to exit. Generally, if you try to end your lease rather than transferring it, you pay the total remaining monthly payments due.

"When a person wants to get out of a lease, it's difficult and very expensive," said Philip Reed, senior consumer advice editor with Edmunds.com. "Essentially you're being held responsible for all of the payments."

People on the buying end of a lease transfer enjoy benefits, too. "You don't have to pay a down payment, which in many cases is anywhere from $2,000 to $5,000, and you don't have to get strapped into a long-term lease," Sternal said.

In 2006, about 28% of new car sales were leases, according to the National Automobile Dealers Association, in McLean, Va.

But, while a lease transfer may sound appealing, consumers on both sides of the deal have homework to do. For instance, those trying to get out of a lease should confirm the finance company is willing to remove the original lease-holder's name from the contract.

Otherwise, the original lease-holder may still be liable for payments if the new "buyer" defaults or if the car is returned to the lease company with worse than normal wear-and-tear.

All in a name

"For the consumer, it's important to remember that you may still have responsibilities for the vehicle, particularly the vehicle's condition," said Paul Taylor, chief economist with the National Automobile Dealers Association. "The legal obligations are just not as simple as the old customer and the new customer would wish them to be," he said.

Others agreed. "It's your name on the contract. You need the permission of the financial institution that holds the lease to transfer that into somebody else's name," said Jack Nerad, executive market analyst with Kelley Blue Book, in Irvine, Calif.

Companies vary widely in their willingness to do lease transfers, and, if they are willing, that doesn't always mean they'll remove the original lease-holder's name.

For instance, Honda Finance prohibits lease transfers. "Our [lease] contracts do not allow trading," said Chris Martin, a spokesman with Honda. Of course, it's possible the lease on your Honda is through another finance company, and that company may allow transfers.

Chrysler Financial allows transfers, but doesn't remove the original lease-holder's name from the contract, said Amber Gowen, a company spokeswoman, in an e-mail message.

"The language of the lease agreement means that the original lessee is still responsible for living up to the agreement if the new party defaults," she said. Often, such lease transfers are between family members, Gowen said.

About 80% of finance companies allow a transfer with a new name on the lease, another 10% allow the transfer but don't remove the original name, and 10% don't permit transfers, said Scot Hall, executive vice president of operations with Swapalease.com, in Cincinnati, Ohio.

'Like a dating service'

Still, if you've confirmed your financial institution will allow you to transfer out, a lease transfer might make sense.

"You might be dealing with an adverse life situation, a death in the family or a loss of a job, and all of a sudden you are looking at a very severe financial situation," Reed said.

You can initiate a lease transfer on your own, without the help of an intermediary, if you can find a suitable buyer. That way you avoid the fees of the sites that offer to find lease buyers, though you don't escape the finance company's transfer fee which can range from zero to $650.

Of course, finding a willing and credit-worthy buyer is one of the sticking points these Web sites help you overcome.

"It's almost like a dating service. We match them up and then tell them, 'this is where you need to go to get this done correctly,'" said Hall, of Swapalease.com.

Homework, for buyers and sellers

The first step for consumers is confirming their lease company's policies with regard to transfers. "I can't stress enough that we only advocate going by the book of your leasing company. We don't want consumers on either side of the equation getting into any trouble," Hall said.

Then, there are the fees to consider. Both the buyer and seller pay fees for using Swapalease.com, LeaseTrader.com or similar services. The buyer and seller can negotiate who pays the finance company's transfer fee.

The lease listing sites charge a variety of fees, and consumers should check to assess which fees are refundable in the event you aren't able to complete a transaction, as not all listings result in a transfer. For example, lease transfers are initiated on about one-third of Swapalease.com listings, Hall said.

For sellers, Swapalease.com offers various packages, including one $49.95 for an indefinite listing with an added $95 one-time fee if a lease transfer is initiated (this fee is nonrefundable but if the transfer doesn't complete, that fee can be applied to another transfer), as well as other packages ranging from $99 to $150, depending on ad placement, with no transfer fee.

Buyers who go to Swapalease.com pay a one-time fee from about $35 to $80, depending on the length of membership and other factors.

At LeaseTrader.com, sellers pay about $79 to list their lease, plus $250 when a lease transfer is initiated, but there is a $100 rebate on that fee.

Buyers at LeaseTrader.com pay $39 to $79 - the price varies depending on how long you get access, plus other factors — and about $150 when a lease transfer is initiated. At both sites, consumers can look at the listings for free.

Buyers beware

Buyers have homework, too. First, compare leases offered on similar models to assess what kind of deal you're getting, Reed said. He suggested LeaseCompare.com and manufacturers' Web sites as they often show lease offers. Edmunds.com also lists lease deals.

Be sure you're comparing total lease payments - some advertisements leave out the tax portion of payment, Reed said.

Verify the condition of the car by either looking at it yourself or hiring a mechanic or another third-party to do so. If the condition of the car does not meet the lease terms for regular wear-and-tear when you return the car, whoever is named on the lease will be forced to pay.

If you're buying a lease from a car owner in another state, ask the finance company whether the payment will change due do the new state's different tax rate.

Finally, assess whether leasing is the right move for you.

"A lot of people think leasing gives more flexibility than buying," Nerad said. "Buying a car gives you more flexibility."

If you own the car, you can simply sell, and if you still owe money on the loan, "there's a standard procedure" for handling that, Nerad said. "To get out of a lease, it becomes more of a one-off situation. You're at the mercy of ... the financial institution."

Meredith Libbey, a spokeswoman with Ford Motor Credit Company, agreed.

"With a lease," Libbey said, "we're the owner, so we have to agree to anything you do."

Copyright (c) 2007 MarketWatch, Inc.