What is an early termination fee?

A fixed-term agreement is a deal for a set period: 12 months of internet service, 24 months of a phone plan, a one-year gym contract, a three-year car lease. In exchange for a lower monthly price, a free device or a waived sign-up charge, you promise to stay for the whole period. If you leave sooner, the contract may let the company charge you for it. That charge is the early termination fee, sometimes called a cancellation fee, an exit fee or a buyout.

The company's reasoning is that it priced the deal on the assumption you would stay. The fee is meant to recover what it gave up, such as a discounted device or installation, and some of the income it expected. It is a term of the contract, so the contract is where you find out whether you owe it and how much.

A fee only exists if your contract says so. Read the cancellation or termination clause before you decide anything, and keep a copy of the version you signed or accepted.

• Phone and internet contracts: a fee for leaving before the end of a service term, often tied to a device or installation you received.
• Gyms and fitness clubs: a fee or the remaining months of a membership when you end a fixed-term agreement early.
• Leases of homes, apartments and storage units: a charge, or a requirement to pay rent until a new tenant is found, for leaving before the lease ends.
• Car leases and finance agreements: a charge for ending the lease early, which can be large because it is tied to the vehicle's value.
• Streaming, software and security services sold on an annual plan: a fee, or no refund of the unused months, if you cancel mid-term.

Month-to-month plans usually have no fee because there is no fixed term to break. The risk sits in plans advertised at a low monthly price in return for a long commitment.

Contracts tend to use one of three methods. The amounts differ by company, so use these descriptions to know what to look for rather than as a prediction of your bill.

In many states a fee that works as a penalty, meaning one far larger than the company's real loss, can be challenged as unenforceable. Whether that argument works depends on your state and the wording of the contract, so treat it as a reason to ask questions, not as a guarantee.

• The service was unusable. If the company did not deliver what it promised, such as an internet connection that repeatedly failed, you can say it breached the contract first. Keep dated records of outages, support tickets and your complaints.
• The contract's own clause covers your situation. Many contracts waive the fee for a move outside the service area, a death or a serious illness. Read the exact words and quote them in your letter.
• A state law gives you a way out. Some gym laws let you cancel after a long-distance move or a disability that stops you using the club. See California Civil Code § 1812.85 and New York General Business Law § 624, listed in the sources below, for two examples.
• A military posting. Federal law for service members allows ending certain leases and phone contracts when you receive qualifying orders, and some companies have their own military policies. Send a copy of the orders with your notice.
• The charge is wrong. If the company bills a fee you do not owe, or bills it after you cancelled in time, you can dispute it as a billing error.

In each case, write to the company, quote the clause or rule you rely on and ask for the fee to be removed in writing. A request by letter creates a record that a phone call does not.

The simplest way to avoid a fee is to end the agreement when the term ends. A fixed term that reaches its end does not continue by itself unless the contract contains an automatic renewal clause that you agreed to. If it does, the company may start a new term, and a new fee clock, unless you give notice first. Our guide to automatic renewal laws by state explains what several states require companies to tell you about renewals.

1. 1

   Find the end date and the notice rule

   Look in the contract or your account for the term end date and for how many days of notice are required. Notice periods of 30 days are common, and some contracts ask for more.

2. 2

   Work out your last safe day

   Count back from the end date using the notice rule and allow for mail time. The cancellation deadline calculator does this for you.

3. 3

   Give written notice before that day

   Say that you are ending the agreement at the end of the current term and that you do not agree to any renewal. You can start from our cancellation letter template or find your company.

4. 4

   Keep proof and ask for confirmation

   Keep the delivery record and ask the company to confirm the end date in writing. Our guide to how to cancel a contract with a notice period covers this in more detail.

If you must leave before the term ends, ask the company what the exact fee is, in writing, before you cancel. Some companies reduce or waive it when you ask, especially if you are leaving for a reason the contract recognizes.

Start with the company. Send a letter that states the date you gave notice, the clause or rule you rely on and the amount you dispute, and keep a copy. If it does not remove the charge, you can dispute it with your card issuer. The FTC explains the process in its guide to disputing credit card charges, and the billing error rules in Regulation Z cover charges for services that were not delivered as agreed. Federal rules set a short window, generally 60 days from the statement that first shows the charge, so act promptly.

The FTC's advice on getting in and out of subscriptions and auto-renewals is to read the terms, find out how to cancel before you sign and keep records of everything you send. If a company keeps charging you after you ended an agreement correctly, see what to do when a company keeps charging you after cancellation.