Leasing a car can be a good option for some people, but before signing a lease, you should know the different types of car leases. Automobile leases in the United States come in two varieties: the open-end lease and the closed-end lease. There is a big difference between these types of leases and if you sign the wrong one, you might end up wishing you had bought the car instead.
The type and degree of financial responsibility consumers assume is the major difference between a closed-end and open-end car lease. At the start of the lease, companies estimate how much the car will be worth when the lease ends; the lender assigns this as the "residual value." This estimated residual value is then compared against market value when the lease ends. In a closed-end lease, consumers don't have to worry about any difference between these values, he can walk away after possibly paying for a little excess wear and tear. With an open-end lease, however, a consumer could be stuck with a big bill should the car not retain market value as expected, as he has to make up the difference.
Closed-end leases are based on the idea that the distance you drive annually is fairly predictable, typically 12,000 miles annually. Open-end lease contracts are more compatible with businesses that have less predictable, but greater, mileage requirements than the average 12,000 miles-per-year of a non-business lease.
Open-end leases carry a shorter term and usually last a minimum of one year, but this type of lease can be extended on a month-to-month basis. Closed-end leases generally run longer -- typically around three years.
Open-end leases are mostly used by companies since the leasing cost can be classified as an expense in their income statements. Closed-end leases are most common for consumer leases, but consumers are not able to consider the lease payments as tax-deductible unless the vehicle is used in conducting their business and the consumer can meet IRS rules for deducting those costs.
- IRS.gov: Income & Expenses
- Forbes: Unbeatable New-Car Lease Deals
- SBA.gov: Small Business Expenses and Tax Deductions
- The Federal Reserve Board: Keys to Vehicle Leasing
- Caldwell Leasing: Weighing Your Fleet Leasing Options: Open- vs. Closed-end Leases
- Erate.com: Leasing a Car: Two Types of Leases - Closed & Open