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DebtSmart,
I have a 2000 Ford Windstar van. I currently owe $20,150.00. The private party retail is $18,225 and trade-in is $15,385 per Kelly Blue book. My payments are $449 a month. At the time I took on these payments I could handle it, but now I cannot. I have tried to trade the van in on a cheaper vehicle, like a 10,000 or 11,000 vehicle. But the car dealers always come back telling me they can't do it unless I could put 3 or 4 thousand down. I already put 5 thousand down when I bought it! And now they want 3 or 4 more! NO WAY. That's 9 thousand. I could almost have a vehicle paid off for that amount. So now I am totally at odds as what to do. It's becoming harder and harder to make the payments each month. I am in a "Red Carpet Lease" program and the lease is not up til April 2003 and can't absolutely hang on til then. I have considered just letting the car go back but was wondering just how bad that would hurt my credit (it's not that great now anyway). Any suggestions?
--Messed up in Texas

Dear "Messed Up":

Your inquiry touches on questions several readers of this space have asked about. Let's start from scratch.

A lease is a contract whereby the vehicle is sold by the dealer, not to you, but to a third party, usually a bank. The bank essentially "rents" the car to you over a set term, varying between 24 - 72 months, based upon depreciation, interest and taxes. If negotiated fairly, leasing serves the primary advantage of substantially lower monthly payments compared to a purchased vehicle. However, leases have several shortcomings in that they are far less flexible if you wish to terminate before the contract ends.

What you are experiencing firsthand, "Messed Up", is this inflexibility. Asking to be released early from the remainder of the term you signed on for requires the remaining amounts to be paid and in most cases, a purchase of the vehicle for your dealer to re-sell. That gets pricey as I will explain.

When you go to the dealer to terminate, the first thing they do is contact the bank which finances it. The bank gives the dealer a "payoff", which, because it includes payments not yet made, plus the residual value of the car at the end of the lease, is far more than the value of your car on the open market. The difference between what the car is worth and what the bank requires to release you, is called "negative gap" or "gap". In your case, the "gap" was quoted as $3,000.00 - $4,000.00. That explains your dilemma.

Incredible as it seems, unscrupulous dealers frequently add even more money to the "gap" they quote, in order to generate additional profits. How much? Would you believe a $2,000 gap can often become $4,000 or more? If it appears you are willing to pay it, some dealers will ask for it. Rarely do consumers find out what happened, because the papers will "bury" the overage into the new car financing. Sneaky, but effective at building dealer profits, at your cost.

Also, know this: Leasing can be obscenely profitable for dealers simply because lending requirements for leases do not mandate full disclosure of the transaction as they do for purchases. The value of a traded vehicle will not appear on a lease finance contract as it must on a purchase finance contract, and indeed I often see cases where the dealer sold the trade without crediting any of the money towards the lease payments! I have also seen consumers be asked to pay a substantial cash payment to initiate a lease, but the money goes not to the lease, but directly into the dealer's pocket, never accounted for! In the truly horrendous cases, trade and cash down payments are made without the consumer having any written documentation of where the money was applied, giving the dealer free rein to retain as much as they please. Some or all of these are factors may be affecting you, "Messed Up".

In sum remember, leases are tricky. The dealer has a great deal of control and can make money and trade disappear in ways you will never notice. Because the term of a lease contract is inflexible, enter a lease only if you intend to keep the car for the entire term, or very close to it. If not, count on paying thousands of dollars in "gap" to terminate any car lease early.

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