Understanding the Two Types of Auto Leasing Agreements
If you’ve been considering leasing and doing research into the practice, you may have seen the terms “open-end” and “closed-end.” These are the two main types of auto leasing agreements that a lessee will sign, and each has significant differences from the other.
Before signing your agreement, it is critical to understand the difference between these two terms. Auto leasing has seen growing popularity among consumers over the last few years, and it is vital that we stay educated on the practice to get the best lease deals.
The difference between these two types of agreements is much more straightforward than it seems on the surface.
We are going to examine the differences between open and closed-end auto leases and discuss who benefits from each type of leasing agreement.
A closed-end lease is what most consumers sign. Sometimes called a “walk away lease,” this agreement allows the consumer to return the vehicle or purchase it at the conclusion of the lease.
In this agreement, the lessee is not responsible for the car’s depreciation. In other words, if the vehicle’s value is less than the dealer estimated, that’s on them.
Most non-commercial consumers prefer this because it lessens their financial risk. No matter what happens in the used vehicle market, the terms of your lease and the amount you will pay at lease end have been laid out in the agreement.
But leasing the car without taking on the financial risk of vehicle ownership does come at some cost.
For dealers to lessen their own risk, they need to be able to predict what the car’s value will be at the end of the lease term with some accuracy. This prediction is called residual value.
To make an accurate prediction, certain factors that have a significant impact on the price of used vehicles need to be assumed. For example, mileage and overall condition. You can learn more about how lease payments are calculated here.
This is why leases have mileage limits and excessive wear and tear fees. If you were allowed to drive the vehicle as much as you wanted, the residual value would be near-impossible to predict. Lessors would lose a lot of money.
So instead, the dealer assumes the risk that the car will be worth less than the residual value. You can just return the vehicle and “walk away” should that happen. In return, you promise to take good care of the car and stay under your mileage limits or pay substantial fees.
If the car is worth more than the buyout price, you can still exercise the purchase option in your agreement and get a great deal.