There are 2 kinds of vehicle leases, closed end and open end. There’s a big difference between the two and this post will help you understand the difference between them.
Close End Leases
These leases are often referred to as walk away leases. It’s called that because at the end of the lease term you can simply drop the vehicle back off, hand in the keys and walk away. You’ll be responsible for any excess mileage and excessive wear and tear but that’s it.
Close end leases are based on the idea that the distance you drive annually is predictable. The leasing company will be able to easily determine the depreciated value of the vehicle after your lease term is up.
When you go to turn in the vehicle at the end of your lease, if the vehicle is worth less than the expected residual value you won’t take the hit, the leasing company will.
However, if the value of the vehicle is higher than anticipated then it may be worth it for you to purchase the vehicle and continue to drive it. You can also choose to buy and then sell it at a profit.
Open End Leases
These leases are normally only used commercially when a business needs to lease a vehicle. Allowable mileage is higher than on a traditional lease.
With an open ended lease, you’re responsible for paying the difference between the residual value of the vehicle and the actual market value. When an open ended lease is used, the residual value is typically set lower, which means that monthly payments will be higher. It minimizes the risk but at a cost.
Summary
As a consumer, if you’re buying a vehicle personally make sure the lease you sign is a close ended lease. Read your contract carefully to make sure that’s the case.
