What happens when you break a novated lease?
Novated Lease is a form of vehicle financing for employees. It’s a three-way agreement between you as the employee, your employer, and the car leasing company. You take out the funds from the lessor to purchase your vehicle and then the employer makes the monthly repayment to them through your pre-tax salary. By doing so, you also reduce your taxable income.
Like other types of car financing, a novated lease runs for a fixed period, ideally over a time that you wish to keep the vehicle for. At the end of your lease, you have the option to:
- Refinance the vehicle
- Pay off the residual value of the vehicle and keep it
- Enter into a new novated lease with a newer car
- Return the car to the lender
In some circumstances, however, you may need to terminate your lease early because you lost your job and need to downsize your ride, are moving out of the country, and various other reasons.
While it is possible to end a car lease early, there are consequences that you need to be aware of.
Early Termination Penalties
Getting out of a novated lease prematurely is quite difficult. With a car loan, you can always sell your car and use the money to pay off your balance. Leasing is another story. Lessors make money on your lease as you make your regular payments within the agreed time frame. Hence, they need to keep you in the car lease for the term. To do this, they set penalty charges for early termination, which include.
- Full payment for the remaining balance of your lease
- Early termination fee
- Costs of preparing the vehicle for sale
- Storage and transportation of the vehicle back to the lessor
- Taxes associated with leasing
- Negative equity between your lease amount and the current value of your car
Paying all of the remaining payments of the lease is typically the costliest penalty.
If your novated lease term is 60 months but you want to terminate the agreement after 36 months, you have to pay the remaining 24 months. If the monthly payment is $200, you will have to come up with $4,800 to get out.
However, some lessors do not require making the remaining payments, but instead, charging a flat amount or allowing for several monthly payments.
Meanwhile, early termination fees can be based on a sliding scale, which means that the amount you must pay decreases as you spend more time on the lease:
- 3 extra payments if you terminate within the first 12 months
- 2 payments if you terminate within the second 12-month time period
- 1 payment if you terminate within the third year
Early termination penalty charges are stiff to keep you from ending your lease prematurely. However, they differ from one lessor to another. It is wise to review your leasing agreement carefully to check which of these penalties are included.
Minimising the Impact of Penalties
Although you have to settle the penalty charges for terminating your novated lease early, you can minimise its impact in several ways:
1. Return the car to the leasing company
This is the simplest way to get out of a car lease because the leasing company will handle all of the details for you. However, you may still have to pay the penalty charges, including the vehicle’s early termination fee and remaining depreciation.
The leasing company will auction the car, which provides the absolute minimum value of the vehicle and then you will pay the difference.
2. Buy the vehicle then sell it
If your lease agreement allows you to buy the car outright during the term of the lease and if the payoff or buyout of the lease is less than the resale value of the vehicle, it may be a smart move to buy the car and then resell it.
Secure the payoff or buyout amount of the car from the leasing company and determine the car’s current value on resale. Is the sales value of the car just a little bit less than its buyout price? Selling it may be a less expensive way to break the lease than other options.
Take note that you may still need to pay the early termination fee.
3. Transfer your lease
You can transfer your lease to someone else as long it is permitted within the terms of your lease agreement and legal in your state.
Some people are interested in assuming the remaining term of a car lease, especially if they do not want to pay the large upfront cap cost payment on a new lease or they are looking for shorter-term car financing arrangements than those offered by new car dealerships.
Don’t know where to start looking for people who are willing to assume your lease? Some websites specialise in lease trading. Just list your car and payment information and soon an interested party will contact you to discuss the arrangements.
4. Buy a new car at the dealership you leased your current vehicle from
If you want to terminate your current auto lease because you want a new vehicle, buy it at the same dealership that offered you the lease. Doing so won’t eliminate all of your early termination penalties but the dealership may waive certain penalties or reduce them.
However, be wary of shrewd dealerships that transfer certain exit fees on your lease within the terms of your new car purchase. This can leave you “upside-down” on the new car.
You can get a quick quote here to know your monthly repayments and what you can expect to borrow before considering this option.
Defaulting on a Novated Lease
As much as possible, do not default on your lease. While doing so would help you get out of your monthly payments, it would greatly impact your credit score negatively, making it difficult for you to secure financing in the future.
You may also deal with debt collection agencies or face judgment for the unpaid early termination penalties and even pay the costs of collection.
If you’re having trouble keeping up with your repayments, get help from friends or seek advice from a financial adviser. For free financial counselling, call the National Debt Helpline at 1800 007 007.
