Closed end lease versus open end lease

What’s the difference between a closed end lease versus an open end lease?

A closed end lease is the most common vehicle leasing arrangement. At the end of a closed-end lease you return the vehicle in good condition and within the agreed-upon mileage and you walk away without owing any money. Or, you can buy the vehicle for the residual value stated in the lease. Buying the vehicle is optional.

An open end lease exposes you to more risk or reward. Where the residual value in a closed end lease is fixed, it’s market based in an open end lease. If you lease a vehicle for 3 years, the leasing company will come up with an estimated residual value and base the lease rates on that value. At the end of the lease, if the market conditions have changed and the vehicle isn’t worth as much as they estimated, YOU pay the difference. If somehow the vehicle is now in high demand and it’s worth more, you get a refund.

Here’s an example: Trucks are a hot commodity in your area, so you lease one with an open end lease. Three years from not, gasoline prices are sky high and nobody wants a truck anymore and the value of your truck has plummeted. It isn’t worth anywhere near what the lessor estimated as its residual value. You turn it in at the end of the lease and you have to pay the difference between what it’s worth as an unwanted vehicle and it estimated residual value.

What are the drawbacks

End of lease charges—If you read the fine print in a closed end lease you’ll see that you agreed to return the vehicle in good condition. However, the leasing company gets to define “good,” not you. They expect normal wear and tear based on the lease term and mileage you accumulate, so they know the tires and brakes will show wear. But they don’t expect to see paint or dash scratches, dents, scraped wheels, missing components, tears or burn marks in the upholstery or stains on the seats. You paid a at the start of the lease and that fee covers the dealer’s cost to have the vehicle professionally detailed to get it ready for resale. But the disposal fee doesn’t cover restoring damaged items. The leasing company will charge you the full retail price to restore or replace those items. If you sign a closed-end lease, you’re responsible for maintaining the interior and exterior in good condition.

No rebate on higher value—Since the leasing company guesses what the vehicle value will be at the end of the lease, they usually err on the side of caution by establishing a lower value. That increases your lease payment. If the actual wholesale value of your vehicle turns out to be higher than their residual value estimate, they come out ahead, but you don’t get a refund. They took the risk so they get the reward.

Advantages

Worry free—You don’t have to worry about the difference between the lease’s stated disposal fee and the then-current market value when you turn in your vehicle. The risk belongs to the leasing company, not you. If you leased a gas guzzler when gas prices were low and three years later gas prices have skyrocketed and the value of your vehicle has dropped by half, it’s not your problem. Hand them the keys and walk away.

Buying opportunity—As mentioned earlier, you may be able to buy the vehicle at the end of the end of the lease by paying the residual value stated in the lease. That value may or may not be a good deal for you, depending on the then-current market conditions. If the market conditions for your vehicle have deteriorated between the beginning and end of the lease, the leasing company may be willing to negotiate the residual valuation, since they’ll have trouble selling the vehicle at auction or on a dealer’s lot.

©, 2016 Rick Muscoplat