What is a Closed-End Lease on a Car?

An easy-to-understand guide to closed-end leases on a car. 

Closed-End Lease Definition

A closed-end lease is a lease that does not require the lessee to make a payment to purchase the asset at the end of their agreement.

Usually, closed-end or open-end leases apply to a car lease. In this case, after the course of their lease is up, the lessee can decide whether they want to walk away or pay a fee to purchase the asset.

The term open-end lease also is called a “true lease” “walkaway lease” or “net lease.” 

Usually, the terms of a closed-end lease are stricter than an open-ended one. However, there is a lower risk for the lessee since are not obligated to own the car at the end of the lease. 


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How Closed-End Leases Are Structured

Closed-end leases typically have a price and time period that stays constant. It normally lasts between 12 to 48 months.

Closed-end leases have a mileage limit of typically between 12,000 and 15,000. If this limit is surpassed, extra fees may be charged on a cents-per-mile basis.

Sometimes these charges will be tiered, which means you’ll pay a flat fee if you exceed a certain mileage threshold. Then, after that, the cents-per-mile charge will apply.  If the lessee wishes to terminate the lease early, they will incur an extra fee as well. 

Although the lessee may be accountable for any wear and tear or extra miles on the car, they are not responsible for owning the depreciated asset at the end of the lease.

The ownership responsibility falls on the lessor, who will likely sell the asset at the end of the lease.

There could be benefits and incentives for the original lessee to then purchase the vehicle. However, the benefit is that the lessee is NOT obligated to purchase it.

Pros and Cons of a Closed-End Lease

ProsCons
Not required to purchase the vehicleExtra fees for exceeding mileage limits
Excessive depreciation does not affect youCharges for wear and tear at end of lease

Pros

The pros of a closed-end lease have to do with the amount of risk associated with the agreement.

As mentioned previously, the lessee does not need to purchase the vehicle or asset after the end of a closed-end lease.

This means that if the vehicle depreciates more than expected, the lessee does not have to worry about the loss of value since they do not need to own the vehicle afterwards. 

Cons

The cons of a closed-end lease have to do with fees. Since the fee structure is a bit different than other types of leases, it provides less flexibility.

If the lessee goes beyond their mileage limit, they generally are charged a lump sum for the first few hundred miles. Then, after that, they are charged for each extra mile driven.

Although the lessee is not obligated to purchase the vehicle after the term is over, they are responsible for any wear and tear that happens over the course of the agreement. This also means that they could be subject to extra fees to terminate or exit the agreement early. 

Closed-End Lease vs. Open-End Lease

Generally, the two types of leases are closed-end or open-end.

Both open-end and closed-end leases are usually in reference to vehicles. 

For an open-end lease, the lessee has more adaptable terms and the individual assumes the devaluation risk of the asset. In a closed-end lease, the lessee takes on the devaluation risk, yet the terms are stricter.

Some people argue that closed-end leases are the best choice since there is no obligation for the lessee to purchase the vehicle at the end of the lease. This is because the lessee does not have to worry about their vehicle or asset losing value over the course of the lease. 

Most leases are closed-end leases. These types of leases provide consistency due to the regularly scheduled installments over the term of the lease if you adhere to the terms. Open-end leases are popular for company vehicles that need more flexible terms for mileage. 

A closed-end lease compared to an open-end can sound a bit confusing at first, but its differences are easily explained through examples. 

Open-End Lease Example

When you enter an open-end lease, there will be an estimation of how much your car will be worth at the end of the lease.

For example, the value of your car could be $30,000, but it will be expected to be worth $15,000 at the end of your lease.

However, if the actual value of your car at the end of the lease is different, let’s say, $10,000, then the lessee will have to pay to make up for this difference since your lease is based on the expected amount. The lessee will have to pay the $5,000 difference. 

Closed-End Lease Example

A closed-end lease does not require you to be responsible for any price differences at the end of the lease. The lessee does not acquire any risk of the vehicle or asset losing value.

Following the above numbers, at the end of a closed-end lease if your car is worth more than the expected value of $15,000, then the lessee should consider purchasing the car.

This is because the lessee can then purchase the vehicle for $15,000 even though it is now worth $20,000 and make a $5,000 profit if they were to sell it. 

Which One is Best for You?

If you are unsure whether you want to own the car after your lease term is up, consider a closed-end lease for the freedom it provides in this area.

However, if the fees that it can come with are not your cup of tea and you’re comfortable with owning the vehicle after the term is up, choose an open-ended lease. 

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