Early repayment of leasing - when is it possible? How to do it?

There are many reasons for terminating a lease early. This may be, for example, a sudden injection of funds that allows the lessee to fully repay the obligation and buy the object. However, more often the reason is that the object of leasing becomes unnecessary - the entrepreneur closes his company, changes the profile of his activity, or simply no longer uses the object. Is it possible to pay off the lease early and under what conditions is it carried out? We advise!

When is it best to pay rent early?

Each of the above reasons is a good reason to think about early repayment of the lease. If this item is already useless in this company, then you should take this step and pay off the rent before the deadline set by the contract. The entrepreneur will be able to sign a new contract and take a new item that will fulfill its role and contribute to the development of the company.

Early repayment of the lease agreement also means the possibility of a faster redemption of the leased asset. Then the entrepreneur will become the full owner of this item and he will not have to pay monthly fees. He will also be able to enter the object in the register of fixed assets of the company.

It’s worth mentioning right away that not in every situation, early termination of the lease will be beneficial, so you should familiarize yourself with the details.

Early repayment of leasing - how to do it?

Obviously, if you want to pay off the lease early, you must inform the company that supports it, that is, the leasing company with which the contract is concluded. Under what conditions this operation will take place depends primarily on what type of leasing it will be applied to. The prepayment terms are different for operating leases and different for finance leases. The applicable rules and details for both situations can be found below.

Early repayment of operating lease

Clients more often choose operational leasing. It consists in using the object in a similar way to a lease - the entrepreneur receives the object for a fixed period and in accordance with the conditions specified in the contract, paying in return the monthly obligations of the obligation, preceded by their own payment. At the same time, the thing that was in use remains on the register of fixed assets of the leasing company, which is obliged to service and write off depreciation. The costs associated with the use of a given object of leasing, for example, a vehicle or a production machine, in this case are lower than its value, which means that early repayment of the lease occurs on specific, predetermined conditions.

First of all, you should know that early repayment of an operating lease is possible only after the expiration of min. 40% of the depreciation period of the leased asset, and in the case of cars - 2 years. If the entrepreneur wants to terminate the contract before this time, he should know that the tax office may be interested in this. Why? Because he may question the tax-deductible expenses calculated on the basis of the rents paid so far.

After this time, you can buy the object, but you should take into account additional costs, which include: the cost of all future payments that must be repaid in accordance with the schedule, the early repayment fee (specified in the lease agreement) and the early termination fee . Each leasing company has its own price list, where you can find out the size of these commissions.

Early repayment of a finance lease

Financial leasing consists in using the given object and transferring the ownership to the entrepreneur along with the payment of the last installment - without the need for a redemption. Therefore, early repayment of an object used in the form of financial leasing is not a big problem. The lease agreement can be terminated at any time during its term, however, it is worth paying attention to the provisions contained in the agreement. Some leasing companies stipulate that early repayment cannot be made earlier than six months after the conclusion of the contract.

In the lease agreement, you can also find information about possible additional costs associated with early repayment, such as processing fees. In addition, the tenant, of course, will have to pay the outstanding debt.

Consequences of early repayment of a lease

Early repayment of the lease does not entail any tax or legal consequences for the tenant. This is because it does not result in the need to write off the company’s previously recognized costs or adjust the entrepreneur’s income. After the end of the contract, the method of settlement with the lessor will change - the expenses will be attributed to expenses that are not subject to taxation.

However, it should be remembered that deadlines must be met. In the case of an operating lease, the possibility of early termination of the contract is possible after exceeding the min. 40% of the amortization period, and in the case of financial leasing, companies set this period individually, but usually it is min. 6 months from the date of signing the contract and the transfer of the object.

Other ways to early terminate the lease

It is worth knowing that leasing companies allow clients to use other solutions that are an alternative to early repayment of leasing. These include options such as:

• lease concession - if an entrepreneur or an individual client does not have enough funds to be able to redeem the leased asset ahead of schedule, he can use the lease concession. It consists in the fact that the leasing agreement will be transferred to another company, and the latter will continue to repay the obligation and will use the item on the same terms on which it was used by the previous lessee. To use this option, it is required to obtain approval for the assignment from the leasing company - it must accept the future client, first of all, having studied his financial situation.
• sublease of a leased asset - the tenant may decide to rent the used item to another company, while charging the appropriate rent. These funds will then be used to pay off the remaining lease payments, so that he does not have to worry about the money to pay the payments. It is worth knowing that the tenant will still be able to exercise the right to purchase, which is an advantage over the first lease assignment option. However, there is a risk that the lessee will not pay the lease payments on time, which will expose the client to late rental payments. The sublease of the leased asset must also be approved by the leasing company.
• repayment schedule change - it is also possible to agree on the terms of repayment with a leasing company. The company may agree to change the terms of the rent, which may be beneficial to the tenant. In this situation, it will be necessary to prepare and sign an annex to the contract, for which an additional fee may be charged.
• return of the leased asset - such a situation occurs when the lessee does not make rental payments on time or the terminated contract is declared invalid.
• termination of the lease agreement - termination of the contract at the request of the lessee is the least financially profitable option. This comes with unfortunate consequences, which include having to pay the remaining installments immediately with interest, return the used item, and pay processing fees. Thus, the tenant will be left without an object and without a large amount of cash.

Early termination of the lease agreement is possible under certain conditions. First of all, the client must have sufficient funds to cover the redemption and repayment of the item and the costs associated with this process. Before applying for an early termination of a lease by early repayment, you should always carefully review the terms contained in the lease agreement. First of all, you should take into account all the fees and commissions associated with the implementation of this formality. Leasing companies use various methods to pay the customer, for example, charging a processing fee or additional fees associated with early repayment. Customers using the facility under an operating lease must also ensure that the 40% depreciation period of the fixed asset has already passed.

In the event that the lessee does not have enough funds to purchase the object and pay off all remaining lease payments, it is worth considering other possible options. This is primarily about the assignment of the lease agreement and the use of the leased asset for sublease.