Posts Tagged ‘closed end lease’

Closed End Lease vs. Open End Lease

Sunday, September 4th, 2011

There are two different types of car leases. One is called the closed end lease and the other is called the open end lease. A closed end lease is more common for most car leasing customers like you. Your car lease agreement or lease contract should specifically mention whether you have a closed end lease or an open end lease. So let’s go ahead and discuss the differences between and the advantages of each type of lease.

Closed End Lease
A closed end lease is also known as a “true lease”, “walkaway lease”, or “net lease”. A closed end lease is probably the type of lease that is most suitable for people like you and me. Designed mainly for consumers as opposed to businesses, a closed end lease allows you to return the car at the end of the lease with no questions asked. Of course, you may have to pay for excessive wear and tear or damage to the vehicle as well as for having an excessive mileage beyond what was covered according to your lease agreement.

With a closed end lease, the leasing company or finance company sets the residual value of the vehicle based upon the annual mileage limit. For instance, if you were to lease a Honda Accord with an annual mileage limit of 12,000 miles for three years, the car would probably retain about 61 percent of its original MSRP. The leasing company comes up with this residual value based upon how much they predict that the value of the car will depreciate given that the lessee will drive a certain number of miles by the end of the lease.

You also have the option to purchase the car at the original residual value that was set by the leasing company on the day that you leased the car. This is definitely a smart decision if the car is worth more than the residual value. If it is, you could probably sell it for a profit. If you don’t, you can continue to drive the car for as long as you please.

Open End Lease
So what is an open end lease? With an open end lease, a residual value is still determined at the time when the lease agreement is signed. However, you, the lessee, is held financially responsible if the value of the car is less than the agreed upon residual value at the end of the lease. This means that you would have to pay for the difference between the residual value and the value of the car at the end of the lease term if the value of the car ends up being less than the agreed upon residual. On the other hand, if the value of the car at the end of the lease term is worth more than the residual value, the leasing company will pay you the difference between that value and the residual value. As you can probably tell, open end leases can cost more than closed end leases. They are generally used more for commercial business leasing.

What Type of Lease is Better?
If you are a consumer who is interested in leasing a vehicle with a good monthly payment, you should always lease a car with a closed end lease. You will save a great deal of money by avoiding a large sum of money that you would be liable to pay with an open end lease if your car’s value has depreciated more than expected.