Leasing a car can be a good option for people craving flexibility. They want to drive a relatively new vehicle. And at the end of the lease, many lessees simply return their vehicle to the dealership. But there are other options. If the lessee isn’t quite ready to give up the car, they can extend their expiring lease. Sometimes dealers will let them extend the lease on a month-by-month basis. Other times lessees will have to sign up for a preset period of time, such as six months or a year.
Here’s a look at some of how leasing a car works and what individuals should understand if they’re considering extending their lease.
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Car Leasing Basics
Before deciding to lease a vehicle, it’s worth mulling over the pros and cons of buying versus leasing. Once you settle on leasing, the first step is to decide on what type of vehicle you’d like to lease and then negotiating the terms of the lease. With a satisfactory lease in hand — one with monthly payments and terms that match the individual’s need — it’s time for you to sign the contract.
Be aware that there are likely acquisition fees that cover the administrative costs of this process. A short-term car lease can be anywhere from 12 to 24 months, while a long-term lease can be up to 60 months. During this period, if the lease no longer serves the lessee, there are ways to get out of the car lease, including early termination, a lease buyout and a lease transfer. If you hang on to the car until the end of the lease, you may consider extending the lease or pursuing a handful of other options.
Types of Car Lease Extensions
You have the option of extending your lease either formally or informally.
1. Informal Car Lease Extension
An informal extension is often a temporary measure that helps smooth out the transition between one lease and another. To take this informal route, you must contact your leasing company and let them know that you want to continue using the vehicle after the lease is up. The company must grant permission for an informal extension. Monthly payments must be paid as they are laid out in the original contract. The extension can then last until the leasing company asks for the vehicle back, usually after six months at most.
2. Formal Car Lease Extension
A formal lease extension, on the other hand, requires signing a legally binding modification to the lease agreement. The agreement kicks in immediately after the initial agreement ends. A formal agreement may include revised monthly rental fees and a new mileage agreement based on the car’s depreciation over the period of the extended lease.
How to Extend a Car Lease
Here’s a look at the steps it takes to extend a lease agreement:
- First, the lessee contacts the lender through which the original lease agreement was made and says they want to request an extension.
- The lender reviews the request and determines whether the lessee is eligible.
- If the request is approved, the lessee will be sent a new contract. This contract will have terms and conditions such as a new end date, mileage allowances and rental fees.
- The lessee signs the modified lease document and returns it to the lender.
Exemptions to Car Lease Extensions
There is a chance that a lease extension will be denied. Here are some of the circumstances for which they may be the case:
- The lessee is behind on lease payments and at risk of defaulting.
- The leasing company decides it needs to recall the vehicle for other commercial reasons.
- There is a previous agreement that hasn’t yet expired.
- The individual did not fill out the lease extension application correctly.
If you want to continue driving the vehicle when the lease is up, you may also have the option of a lease buyout. Check the lease agreement to see if this is a possibility.
There are some obvious advantages to a lease buyout. First, you know the car’s entire history, whether you’ve maintained it perfectly or if there have been any troubles. In comparison, individuals buying another used vehicle have much less insight into the car’s past. If your maintenance of the vehicle leaves something to be desired, or if you put too many miles on the vehicle, your lease could put you on the hook for extra fees to cover the wear and tear.
However, a lease buyout could avoid those expenses. A lease buyout could also end up costing less over time than continuing a cycle of leasing new vehicles. Those who know they want to buy out their lease from the get-go should let the leasing company know before signing a contract. This can help in negotiating lease disposition fees, which are fees lessees agree to pay to the leasing company upon returning a vehicle.
Downsides of a Lease Buyout
There are also some potential downsides to a lease buyout. For one, staying in the lease cycle ensures that you are always driving a relatively new car. If this factor is important — to your sense of safety, for example — a buyout may not be a good idea. It’s also possible that a lease buyout can end up costing you more than other options. For example, buying out a lease without making a new down payment may lead to monthly payments that are higher than lease payments.
Also, buying out a leased car may be more expensive than buying a similar used car on the open market that’s just a little bit older.
Financing a Lease Buyout
If you decide you want to buy out your lease, you can pay for the car in cash if you have enough on hand or you can seek financing. Some financial institutions offer lease buyout loans. It’s best to shop around to different lenders to find the loan that offers the lowest interest rates and most manageable terms. Shorter loan terms tend to come with higher monthly payments, though individuals may end up paying less interest over the life of the loan.
The annual percentage rate (APR), which represents the yearly cost of carrying a loan, tends to be higher for lease buyouts than new cars.
Refinance a Car Loan
In the future, if auto loan payments become untenable, an individual’s financial situation improves, or interest rates drop, it may be worthwhile considering an auto loan refinance. When refinancing a loan, borrowers take out a new loan to pay off the old one. Ideally, this new loan will free up some cash by offering a lower interest rate or better terms that make monthly payments easier to manage. Individuals may use their increased cash flow to pay off the loan faster or to focus on other financial goals.
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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