There are two types of vehicle leases, Close-end and Open-end, make sure you get the right one. Before signing a lease contract, you need to understand the differences between the two, which are pretty big. Federal regulations mandate that the type of lease is clearly visible on all auto lease contracts.
Most salespeople don’t have this level of knowledge about car lease specials, so don’t ask. Since they will just try to give you the answer they think you want to hear. It’s crucial to read over the contract yourself.
The most common type of consumer lease is a closed-end lease, also called “walk-away” lease. It lets you simply return your leased car once the lease is over and have no other responsibilities besides possible mileage or excessive damage charges.
The concept of closed-end leases is based on the assumption that the annual miles you drive are somewhat predictable (typically 12,000 miles per year), that the car won’t be driven in rough conditions, and that the car’s value will, therefore, be predictable at the end of your lease.
When you start the lease, the leasing company will use the expected number of driven miles to estimate the car’s lease-end residual value. If the vehicle ends up being worth less than the estimated residual value when the lease is over, the leasing company will absorb the hit, not you.
However, if the vehicle’s worth ends up being more than the residual value, you’ll have the option to buy it and keep driving it. Which actually happens fairly often.
Open-end leases are mainly used in commercial business leasing. In these types of leases, the lessee rather than the leasing company assumes all financial risks. Which is usually not a big problem since this can be expensed for the business. The other difference is that the annual less predictable and thus greater than 12,000 miles are allowed.
In open-end leases, it’s your responsibility to pay any difference in the residual value and actual market value at the end of the lease term. This could add up to a big sum of money if your vehicle’s value dropped or you drove a lot more miles than expected. It’s common for the residual value to be set much lower in an open-end lease than in a closed-end lease, which lowers the lease-end risk. But it can also greatly increase your monthly payments.
Besides consumer leasing, there is also options of lease for businesses. It comes with many added tax benefits that are not available for personal leases. Business lease evaluation should be handled by a business finance advisor or tax accountant who is familiar with the financial details of the business.
To find out more about business car leases, talk to a fleet manager at a local dealership to discuss and determine what type of lease is best for your particular business.
If you’re a consumer and not a business, make sure to only choose closed-end leases. Most non-business leases you will come across will be this type, but it still doesn’t hurt to double check on the contract just to be certain.