Put simply, a vehicle’s lease term is the period of time which the vehicle will be leased for. This term is agreed upon up front and may vary for different drivers within your fleet. Depending on the type of lease, you may encounter a straight lease term, a variable lease term, or an open-ended lease term.
Straight Term Lease
Under this type of arrangement, the lease term is fixed up front. The lessee is contractually obligated to lease the vehicle from the lessor for the agreed upon amount of time. If the lessee wishes to terminate the lease early, they may be subject to early termination fees, which can vary greatly between fleet management companies. The advantage of this type of lease term is the ability to set a defined life cycle for your vehicles.
(Leasing companies that specialize in Closed End leases will typically allow you to renegotiate your lease term, even in the middle of the contract, without a change fee. However, your lease rate is likely to change.)
Example) A lease written as 36 months/45,000 miles has a term of 36 months.
Variable Term Lease
Like the straight term closed end lease, a variable term closed end lease caps the period of time in which the vehicle is leased for. However, unlike the straight term closed end lease, the variable term lease also contains a provision that allows the lease to terminate upon hitting a specified mileage threshold determined prior to inception. Because of the mileage trigger, each driver’s lease term may vary.
Example) A variable term closed end lease may be written as expiring in 48 months OR 80,000 miles, whichever occurs first.
*Pro Tip* – A Closed End lease with a Variable Term (where vehicles are cycled based upon mileage rather than a specified term) should NEVER have an excess mileage charge.
Open End Lease Term – (Equity Lease)
The 3 rd type of lease term that you may encounter is that of an open-end lease. Unlike the straight term and variable term lease, an open-end lease contains no set term. It closely resembles a vehicle purchase, with the lessee typically paying down the vehicle by a set depreciation amount each month. With this type of lease, the lessee can terminate the lease at any point (By Generally Accepted Accounting Principes or GAAP, a vehicle must be kept on lease for a minimum of 12 months). However, with this type of lease, the lessee is responsible for all of the equity, either positive OR negative. Because of this, they’ll want to ensure that they do their due diligence before deciding to terminate a lease.
Example) A company with an open-end lease arrangement may decide to terminate the lease after 20 months. At that point, the lease ends, however they will be responsible for the difference between what they still owe on the vehicle, and the market value of the vehicle.
*Pro Tip* – You will want to ensure that you ALWAYS receive an Amortization Schedule if you enter an Open End (Equity) lease