An equity lease, also commonly referred to as an “open-end lease”, “TRAC lease”, “finance lease”, or “capital lease”, refers to a type of lease where the cost of the vehicle is depreciated a set amount each month until you reach a predetermined balance (or zero balance at all).
Pros of Equity Leases
Many companies utilize equity leases because of the flexibility that it provides them. Equity leases generally come with no mileage restrictions, thus eliminating any potential end-of-lease excess mileage fees.
Equity leases also allow for the user to get out of the lease at nearly any point of their choosing (generally there’s a minimum term of 12 months in order to be considered a lease by accounting standards). Unlike closed-end leases, there is no fixed term with an equity lease.
Companies who tend to be a bit rougher on their vehicles also prefer equity leasing because there is generally no lease-end damage on return bill (more on that later).
Cons of Equity Leases
While there are many great qualities that make equity leases quite attractive, there are also some significant drawbacks.
For many, the biggest downside of equity leases is the fact that the entire brunt of the financial risk upon resale lays with the user. With a closed-end lease, the lessor is assuming that risk. Not the case with an equity lease. This can be a positive or a negative depending on market conditions and your remarketing expertise.
Example) You’re in an equity lease and depreciating the vehicle at 2% per month. After 36 months, you decide that you want to get out of the lease. The remaining book value of the vehicle is $10,000, however due to market conditions, it can only be sold for $7,000. If you elect to get out of the lease, you’re going to be responsible for that $3,000 deficit.
Conversely, assume the same scenario, except the used vehicle market is in an uptrend and the vehicle can be sold for $12,000. That additional $2,000 is yours to keep.
This correlates directly with the points made earlier regarding excess mileage and damage-on-return fees. While there are no set restrictions on either, since the financial responsibility is ultimately yours, you will end up paying for it through a diminished resale value.
An equity lease is a fantastic tool for the right situation, but careful analysis should be done prior to determining which lease type is right for your company.