Closed-End Car Leases Vs. Open-End

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.