Types of Leases

Two types of car leases - open and closed

Automobile leases come in two varieties: closed-end and open-end. There's a big difference between the two types and you should understand that difference before you sign your lease contract. Federal regulations require that the type of lease be clearly indicated on all lease contracts.

Dealer salespeople typcially don't have this level of understanding of leases. So, don't ask. You'll only get the answer he/she thinks you want to hear. Read the contract form for yourself.

Closed-end leases, sometimes called "walk-away" leases, are most common for consumer leases today. This type of lease allows you to simply return your vehicle at the end of the lease and have no other responsibilities other than possible payment of excessive damage or mileage charges.

Closed-end leases are based on the concept that the number of miles you drive annually is fairly predictable (12,000 miles per year is typical), that the vehicle will not be driven in rough or abusive conditions, and that its value at the end of the lease (the residual) is therefore somewhat predictable.

At the time you lease, the leasing company estimates the vehicle's lease-end residual value based on the expected number of driven miles. If the vehicle is actually worth less than the residual when you turn it in, the leasing company takes the financial hit, not you.

On the other hand, if the vehicle is worth more than the residual, and you have the option to purchase, you may want to buy the vehicle, then keep driving it or sell it and make a profit. This happens frequently.

Open-end leases are used primarily for commercial business leasing. In this case the lessee, not the leasing company, takes all the financial risks, which is not so much a problem for a business, since the cost can be expensed. Annual mileage on a business lease is usually much greater and less predictable than the average 12,000 miles-per-year of a non-business lease.

In open-end leases, you are responsible for paying any difference between the estimated lease-end value (the residual) and the actual market value at the end of the lease. This could amount to a significant sum of money if the market value of your vehicle has dropped or you drive many more miles than expected. Often, the residual for an open-end lease is set much lower than for a non-business closed-end lease, which reduces the lease-end risk, but can significantly increase the monthly payment amount.

Business Leasing

This web site is primarily about consumer leasing, not commercial or business leasing. Although there are similarities, there are also many differences. Evaluation of a business lease is best handled by a tax accountant or business finance advisor who is familiar with details of the business and it's financial objectives.

If you are interested in a business lease, see the fleet manager at your local dealer to make arrangements and to determine which type of lease will be best for your business — after consulting with your tax advisor.

Consumer Leasing

As a consumer, make sure you only agree to a closed-end consumer lease. Even though most non-business leases you'll encounter will be of this type, read your contract closely just to be certain. Most consumer lease contract forms will clearly state, at the top of the form, that it is for a closed-end lease.

Open-end leases seem to be more popular for non-business consumers in Canada, although it's not clear why. Be sure to decide which you need, and check your contract before you sign. Furthermore, closed-end consumer leases in Canada often don't include a lease-end purchase option.