A closed-end car lease means the lessee walks away at the end of the lease term with no further obligations. An open-end lease means the lessee may have additional financial obligations at the end of the lease term. Because of the more limited risks, a closed-end lease is more common among consumers, according to LeaseGuide.com.
Reading contract terms before signing a car lease helps you avoid the mistake of taking on the wrong type.
A closed-end lease is intended for people who drive around 12,000 miles or less per year. You agree to pay a certain amount each month to the dealership or leasing agency in exchange for the right to drive the car. At the end of the term, such as 36 or 39 months, your only potential obligation is to pay for damages or vehicle wear, according to Erate.
The benefit of a closed-end lease to a consumer is that it doesn't tie you down financially. When you purchase a car, you typically take out a loan and have to pay it off over time regardless of the condition of the car. With a closed-end lease, you make monthly payments and the lessor takes on most of the responsibility for the basic depreciation of the car, according to CreditFinancePlus.com.
The primary difference with an open-end lease is that the lessee accepts most of the financial responsibilities for maintaining the car. The lessee assumes the hit from vehicle depreciation as well. Open-end lease contracts normally allow much more than 12,000 miles per year of driving, according to Erate, because they are primarily used for businesses.
With an open-end lease, the lessee pays the residual difference between the payments on the car and the market value after the lease term. If the market value is $5,000, for instance, and the lessee's estimated residual value is $7,000, the lessee must cover the additional $2,000. You aren't obligated to pay the residual on a closed-end contract, and it is advantageous to buy the car if it is worth more than the residual amount. LeaseGuide.com points out that the residual expense is sometimes significant on commercial leases if the usage of the car by employees is much higher than anticipated when the lease contract was put in place.
