A closed-end lease is a type of rental agreement where the leasing company (Lessor) is responsible for the loss or gain in resale at the end of the agreement. Typically, a closed-end lease has fixed term (usually measured in months) and mileage allowance. At the end of the contract, while generally given the option, the lessee is under no obligation to purchase the remainder of the vehicle. They can simply return the vehicle and “walk away.”
Example) A 36-month lease with a 60,000-mileage allowance
Unlike an “equity lease”, where the lease rate is primarily determined by capitalized cost, a closed-end lease rate is highly sensitive to specifics such as make, model, trim, lease term, and mileage. That is because the lease rate of a closed-end lease is primarily determined by the vehicle’s residual value (anticipated value at lease end). The residual value is determined at the beginning of the lease by the leasing company, however, unlike an Equity (or Open End) lease – you are not responsible for that value at the end. Removing risk is a key differentiator in Closed End Leases. In Equity Leases you are responsible for the loss or gain in the value of the vehicle. Closed End leases remove you from that risk. Additionally, closed end leases may allow you (the lessee) to get a nicer, more highly equipped vehicle for a lower cost based upon a higher residual value than a less expensive, lower equipped vehicles.
Example) Car A, a $30,000 vehicle with a $18,000 residual value may lease for a lower amount than Car B, a $27,000 vehicle with a $12,000 residual value despite the fact that Car B costs $3,000 less than Car A.
In addition to being insulated from the risks of the used car market, a Closed-End lease allows you to budget your transportation expense at the beginning of the agreement rather than waiting until the vehicle is sold to discover what your true costs were. Granted, there is an excess mileage charge with a closed-end lease, however, it is important to keep in mind that you will pay for the portion of the vehicle that you use regardless of whether you are in an Equity Lease, purchase the vehicle outright, or in a Closed-End lease.
Another advantage of closed-end leasing is the ability to establish a set life-cycle for your vehicles. Knowing exactly when you’re going to replace your vehicles will allow you to properly manage logistics, forecast necessary repair work, and keep drivers in new, late model vehicles with the latest advanced safety features.