Does Breaking a Lease Hurt Your Credit?

Leasing companies refer to breaking a car lease as “early termination.” When you terminate your lease agreement early, you end your lease before the agreed-upon termination date. You can end a car lease early at any point. 

For example, you might end your lease early because you can no longer make payments. If you can’t afford your car lease payments anymore, early termination may be better than defaulting on your loan. Defaulting on a loan significantly impacts your credit and remains on your credit report for several years.

In addition, terminating your car lease terms early comes with several fees, including: 

• Remaining lease payments, including taxes 
• Early termination fee
• Disposition fee to prepare the car for sale 
• Any applicable lease penalty fees (excess mileage or wear and tear)
• Any additional fees assessed by the leasing company

Most lease agreements stipulate what fees and penalties are involved in the event of early termination. If you’re considering breaking your lease, consider your lease agreement to total your costs. Factor this amount into your decision to end your lease or continue to make payments. 

Breaking a car lease hurts your credit score when you voluntarily repossess or default on your loan. Defaulting on your lease results in a loss of 100 points or more, and you’ll have a negative mark on your credit report for up to seven years. Voluntary repossession has a similar effect, though lenders may look more kindly upon a voluntary repossession than a straight default on your loan. Breaking your car lease early and paying off your balance due, however, won’t directly impact your credit score. 

When you pay off your lease loan balance, the credit bureaus consider that credit record closed. It’s similar to paying off a car loan, personal loan, or any other installment loan. Removing that line of credit from your credit report can have some mixed effects, depending on your credit situation. 

For example, car lease loans affect your credit mix and debt-to-income ratio. It’s pretty straightforward that paying off the debt of your car lease loan will improve your debt-to-income ratio by lowering your debt. However, if you don’t have another installment loan to diversify your credit types, your credit score may suffer by closing the car lease loan. Your score should bounce back relatively quickly if you decide to lease again. 

These changes to your credit score and report apply whether you pay the leasing company in full to close your lease or sell your car to a dealership where they take over the lease instead. Buying out your lease will have a similar impact on your credit report because you’ve satisfied the lease agreement terms, whether you finance or purchase outright.  

Early termination fees are one of the many car lease fees to avoid if you can manage it. However, if you must choose between damaging your credit score and paying extra fines to get out of your lease, fines are almost always the better choice. 

Depending on how far into your lease you are, your leasing company may offer to terminate your lease early if you agree to another lease. Any remaining payments are rolled into your new lease. While this solution can help you avoid hurting your credit, it sets you up to pay even more than you did with the first lease. If you could barely afford your payments previously, affording the new lease presents an even more significant challenge. 

Transfer your lease

SwapALease and LeaseTrader connect individuals who want to swap or transfer car leases. If you want to avoid hurting your credit but need to get out of your lease, these websites can present a viable solution. However, before you look too deep into transferring your lease, you should consult your lease agreement for any stipulations about lease transfers. 

When you transfer your lease, the person you’re transferring the lease to must meet the exact requirements you did when you initiated the lease. Often, this arrangement includes a three-way conversation between you, the new lessee, and your leasing company. You may have to pay a lease transfer fee. Some lease transfer arrangements also stipulate that you’re still responsible for any payments should the new lessee default. 

Trade in your car

If finding someone to take over your lease sounds like too much of a hassle, consider trading your car in for another. Again, before you look too much into this option, consult your lease agreement to see how your leasing company handles trading in or selling your lease. Many leasing companies and dealerships expect to receive your lease back and sell it for a profit. 

When you trade in your car, you’re responsible for any negative equity in your lease. For example, if the dealership gives you a $5,000 trade-in value on your lease and you owe $7,500, you must come up with the $2,500 difference. Often, dealerships require you to write a check for this amount to accept your trade-in. 

Sell your car

Selling your leased car and coming up with a different transportation solution can help you get out of your lease and gain some breathing room. You can sell your car to a dealership or privately, though dealerships are often the more convenient solution. When you sell private party, you must disclose that the car is under a lease, similar to how you would disclose a car loan if that were the case. 

If you plan on selling your car, identifying any negative equity you have in the vehicle before visiting the dealership can help in your negotiations. You’re still responsible for the difference between the sales price and what you still owe on the lease, whether you trade in or sell the vehicle. 

Buy out the lease

Buying out your lease will not hurt your credit. Lessees often choose to buy their lease because they’ve grown attached to it and know most of the vehicle’s maintenance history. Buying out a lease can also offer the potential to profit from selling the car, depending on market conditions.  

One of the first steps to buy out your lease is determining how lease payments are calculated. Consider the residual value, remaining lease payments, lease buyout fees, and any additional fees for buying out your lease (registration, titling, licensing, etc.). Many lease agreements list the buy-out price if the dealership or leasing company allows you to purchase your lease after the lease ends. 

Your car lease should appear on your credit report within 30 to 60 days. Most leasing companies report your car lease installment loan to at least one credit bureau, but most of the time, it’s to all three credit bureaus. 

However, lenders don’t have to report your car lease to any credit bureaus, so check with your leasing company to learn more about their reporting habits. You can also request a free annual report from AnnualCreditReport.com to check if your car lease appears on your credit report. 

Finding the best car lease deals can be an exciting challenge, especially if you want to drive a car worth more than you can afford to finance. If you find yourself at the end of a car lease and unsure what to do next, here are a few options you should consider: 

• Buy: Purchasing a car is a milestone for many people, and it takes quite a bit of researching, test-driving, and haggling to get the car you want. Financing a car can also have mixed effects on your credit. 
• Rent: Long-term rentals can help you take the time to make the right decision for your lifestyle. However, they can be expensive, and you’re often stuck with what the rental company has available. 
• Car sharing: Many car-sharing companies make jetting around big cities a breeze if you don’t want to invest in a car. However, if you live in a smaller city and need constant availability, car sharing may not fit the bill.

If none of the options above satisfy your needs, check out FINN car subscriptions. FINN offers a robust fleet of vehicles ready to deliver to your door. You can pick from short terms and select the mileage you want. FINN makes it easy to plan for your budget with a single monthly payment that includes almost everything but fuel.