Let the Lessee Beware: Car Leases Can Be the Most Binding of Contracts
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Version 0 of 1. WHEN Allie Mangel learned that she was losing some of her vision because of a rare condition called Susac’s Syndrome, the last thing on her mind was figuring out how to make her car lease payments. After her doctor notified the California Department of Motor Vehicles last November that she should not be allowed to drive, and her license was subsequently suspended, leasing a Ford Edge at $347 a month became an unnecessary expense. Or so she thought. Ms. Mangel, 24, a youth programming coordinator in San Diego, discovered that even though she was not legally allowed to drive, she was still legally obligated to make her lease payments. “Ford Credit and the dealer told me that the only way I could get out of the lease was to die or join the military,” Ms. Mangel said. She had learned the hard way what many people may not realize, even though leasing has become an increasingly common and seemingly affordable alternative to buying a car. A car lease agreement is like any other contract. And unless specific reasons are stated in the agreement allowing the lessee to end the lease, the signer must make the payments, whether one can drive or not. After her diagnosis, Ms. Mangel was in the hospital for three weeks and out of work for a total of five, and running short of money. “I was a mess,” Ms. Mangel recalled. “I was going through all these things and Ford would not budge. I was in tears and didn’t know what to do.” Ms. Mangel had signed a lease agreement spelling out the terms of the contract, and ending the lease early without penalty was not covered. The rules are the rules, according to Margaret Mellott, a spokeswoman for Ford Motor Credit. “All Ford Credit lease agreements state very clearly the obligations when one turns in a car before the end of a lease agreement,” Ms. Mellott said. “I’m not aware of any exceptions being made.” Ford Credit and most other vehicle leasing companies do give lessees options for breaking the contract. But the terms can be severe. Ms. Mangel could have returned the vehicle to the dealer, and then paid the difference between the amount owed on her payments and the value of the car if sold at auction. In her case, that would have been an unbearable burden: about $15,000. Or she could have tried to sell her lease to a third party through a lease-swapping company. But with membership and lease transfer fees, that would have also cost her more than she could afford. “A friend tried to do that,’’ she said, “and he received no interest after it being listed for weeks.” Some lessors may demand payment of all the remaining payments, plus penalties. If the lessee decides simply to walk away from the lease and have the vehicle repossessed, the person’s credit rating will suffer. Leasing a vehicle, of course, is not the same as purchasing one. Rather, it’s more akin to renting an apartment; as with any rental, one never actually owns the property. Under a vehicle lease, the lessee agrees to make payments for a fixed number of years. Those payments equal the difference between the agreed-upon value of the car when first leased and its predicted residual wholesale value at the end of the lease, plus interest. Because the entire value of the car is not being financed, the payments are less on a monthly basis than they would be if the vehicle were purchased over the same period. That is a main reason that leasing is so popular: It lets consumers drive cars that are more expensive than those they might be able to afford to buy. When the vehicle is returned at the end of the lease, the only additional costs are those incurred if the vehicle was driven more than the maximum agreed-upon mileage, any amount due for damage beyond normal wear and tear, and any turn-in fees. The lessee may also decide to purchase the vehicle, for that contracted residual value. One reason car leases tend to be so inflexible is that the deal is a three-party contract: The dealer signs the lease with the customer, and then assigns the contract to a leasing company. Leases can be voided if the original agreement was made under untruthful conditions — if the lessee is a minor, for example, or does not possess a valid driver’s license. In those cases, the leasing company would not want to be part of a fraudulent contract. “This is not as rare as one would think — people do fraudulent deals all the time,” said Randall McCathren, managing director of the Association of Consumer Vehicle Lessors, a trade group. In addition, if the lease terms or the vehicle was misrepresented, the lessee can try to void the lease under each state’s laws on unfair and deceptive acts and practices, Mr. McCathren said. But in a legally struck deal, even death will not necessarily free one from a lease obligation. Typically, the dead person’s estate becomes liable for the obligation, although some car finance companies will make exceptions. Still, it never hurts to try to seek concessions. “It absolutely pays to contact the leaseholder and try to work out some consideration,” Mr. McCathren said. He noted that leasing companies will typically defer payments if a lessee is in the hospital for a limited period of time. Only one action will guarantee that someone is able to break any company’s vehicle lease. Under the federal Servicemembers Civil Relief Act, a person who has enlisted in the armed services and is to be assigned to a location outside the continental United States for more than six months can terminate a vehicle lease without penalty. But for those who are not joining the military, the best bet for getting out of a vehicle lease is to try to sell it to a third party. Companies like Leasetrader.com and Swapalease.com act as brokers, and for a fee will try to match lease sellers and buyers. But the manufacturers of some vehicles, including Land Rovers leased through Land Rover Financial Group, and Volvos leased through Volvo Car Financial Services, do not allow transfer of leases. Swapalease maintains a list of vehicle manufacturers’ leasing policies on its website. Some leasing companies, including Ford Motor Credit and Mercedes-Benz Financial Services, will allow a lease obligation to be forgiven upon the death of the lessee. Under Mercedes’s Customer Bereavement Program, when the company learns of the death of a lessee, it sends a condolence letter to the family, as well as a leather journal and pen to help it manage the estate’s obligations. If the Mercedes lease account is current, the family can choose to return the vehicle within 10 days and owe nothing further. If the family decides to keep leasing the vehicle and the new lessee meets credit criteria, no transfer fee is charged. Ford Motor Credit’s Peace of Mind program allows the family of a deceased lessee, with a death certificate, to return the vehicle within 60 days of the death, and the lease obligation will be excused. Notifying the company of the death also prevents any company collection activity over the next several weeks. Ms. Mangel, as things turned out, was more fortunate than she had expected. Her vision stabilized a few months after she lost her license, and she was able to drive again. In the interim, her father covered the lease payments. But the terms and conditions of her lease made her realize that while the payments may be lower, leasing a vehicle can be more onerous than buying one. “I don’t want to lease again, ever,” Ms. Mangel said. |