Open-End vs. Closed-End Leases - Which Is Best for Your Businesses?
Carlease Staff - April 20, 2018
If you're in the market for a business auto lease or commercial fleet lease, you'll have the option to choose between open-end vs. closed-end leases. Each type of lease has its own set of parameters and rules. As a result, one type of lease may work better for your business, while the other may result in unfavorable conditions.
Fortunately, the experts at Carlease.com are here to help guide you through the process. We can use our decades of experience to ensure you understand all of your options. Then, we can explain the best auto lease that will help meet your businesses needs for today and tomorrow. In the meantime, continue reading to learn more about both closed-end leases vs open-end lease and what you should consider when choosing one over the other.
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The closed-end lease is undoubtedly the most common type of lease and is widely used among consumers. With this type of lease, the lessor, leasing company, or the party who owns the vehicle accepts responsibility for the depreciation on the vehicle. However, to protect their interests the lessor will limit the amount of mileage allowed on the vehicle and set protections from excessive wear and tear.
At the end of a closed-end lease, you'll have the option to return the vehicle or purchase it is at the predetermined residual value. If you return the vehicle, you may be liable to pay any additional fees for excessive wear and tear and/or excessive miles. As the lessee, you are not responsible for any of the vehicle's depreciation outside of the terms listed in the contract.
Why Businesses Choose a Closed-End Lease
A closed-end lease may be a good option if your business is able to stay within the mileage restrictions. This option can be a low-cost, hassle-free way to drive a new fleet of vehicles for a fraction of the cost associated with purchasing the vehicle outright.
In addition, your lease payments may be 100% tax deductible and can be accounted as an expense instead of a capital expenditure on your balance sheet. This can make your business look more attractive to banks and lenders to help fuel your short-term and long-term growth.
Key Points to Consider with Closed-End Lease
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With a closed-end lease, you will know the vehicle's residual value from the beginning. The residual value is what's left or what you can purchase the vehicle for once the terms of the lease have been satisfied.
- If the market value of the leased vehicle is higher than its residual value, (positive equity) you may able to purchase the vehicle and resell it to generate a profit.
- In contrast, if the market value of the vehicle is lower than the residual value (negative equity), you'll be best suited to pay any excessive wear and tear charges or mileage fees and return the vehicle to the owner.
In the end, closed-end leases have the benefit of predictable monthly payments with very little residual risk to you.
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The open-end lease is more often used by businesses and for commercial use. Open-end leases may also be called:
- Operating lease
- Capital lease
- Finance lease
- Terminal Rental Adjustment Clause (TRAC) lease
An open-end lease typically starts off by you agreeing to a minimum term, such as 12 months. After this minimum term has been satisfied, you can continue leasing the vehicle on a month-to-month basis or terminate the least at any point, which is when you could sell the vehicle.
If the proceeds from the sale are more than the amount calculated in the agreement, your company can keep the profits. However, if the vehicle is sold for less, you’ll be required to reimburse the lessor for the difference.
Key Points to Consider with Open-End Lease
While the leasing company retains responsibility for the value of the vehicle in a closed-end lease, the open-end lease shifts this responsibility to you. In other words, you will guarantee the value of the vehicle at lease end. Because of this, open-ended leases are more flexible and do not have mileage restrictions.
Who Uses Open-End Leases?
As previously mentioned, open-end leases are commonly associated with commercial purposes. This is primarily due to the fact that open-end leases offer you the ability to enjoy unlimited mileage.
Offering more flexibility and control, open-end leases appeal to organizations with more unpredictable mileage needs. They are regularly used by courier and transport companies who amortize the actual cost of depreciation to circumvent end-of-lease penalties.
How to Choose Between Open-End vs. Closed-End Leases?
At Carlease.com, we will help you evaluate all of your business leasing options. In the process, make sure to keep the following two considerations in mind.
- The amount of flexibility your business needs
- The amount of risk your organization can handle
Does Your Business Require Flexibility?
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With a closed-end lease, your business will have limited flexibility. The standard closed-end lease can range from 12 months up to 48 months with annual mileage allotments ranging from 12,000 through 15,000. If your business exceeds the annual mileage allowance, you’ll be responsible for the excess mileage fee, which can be anywhere from $.15 as high as $.35 per mile you exceed the limit.
However, if your drivers do not use all the miles, you will not receive any type of mileage credit. In contrast, an open-end lease doesn’t have mileage restrictions and allows the flexibility many businesses need.
Image c/o DoeringFleetManagement.com
Another key flexibility component to consider is the number of vehicle’s your business will need and how this may change in the future. Let’s say you start a closed-end lease for 36 months on 10 fleet vehicles.
After year one, you decide you need to cut your fleet down to five vehicles. With a closed-end lease, your business would still be required to pay the lease on all 10 vehicles for the duration of the lease — even if the vehicles are not being used.
However, the open-end lease promotes much more flexibility. It allows you to contract or expand your fleet as the needs of your business change. For instance, at the end of the open-end minimum term, you can opt to continue leasing the vehicles on a convenient monthly basis until the vehicle is owned by your company and it has a book of zero.
Can Your Company Manage Risk?
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With the open type of business lease, your business will essentially assume all of the risk — the good and bad. While you could have to pay the lessor if the actual value of the vehicle is less than the contract value; you could benefit if the vehicle’s value is more than the contract agreement.
For example, let’s say you start an open-end lease expecting to drive 13,000 miles every year. However, at the end of year one you realize you’ve amassed 15,000 miles. You will be responsible for the risk associated with the extra usage affecting the depreciated value of the vehicle.
You should also be aware of other risk factors that may affect the value of the vehicle, such as:
- Seasonal fluctuations
- Market demand
- Interest rates
In contrast, a closed-end lease moves all of the risk away from your business and to the leasing company. With a closed-end lease, as long as you return the vehicle in acceptable condition, you can walk away at the lease end.
Contact Carlease.com to Choose the Best Business Lease
In business, there are no one-size-fits-all solutions! What works perfectly for one company may result in a total catastrophe for another company. Because of this, the experts at Carlease.com will approach your business leasing needs with an open mind.
We bring decades of experience helping business owners across all sectors find the best business lease for to support their business goals. And we will do the same for you.