This is part of Glossary of terms for car buyers series breaks down all the terms you need to know if you buy a new one or old car from one authorized dealer.
A new car lease is a relatively short-term deal: In exchange for a monthly payment and a few fees, as well as a (possibly) upfront, you drive with new car. There is almost always a mileage limit. At the end of the lease, you return the car. You are responsible for any damage to the vehicle beyond normal wear and tear, and if you exceed the mileage limit, there will usually be an additional per-mile charge. There are also turn-by-turn fees that can often be waived if you lease a new lease from the same seller.
Most leases will allow you to “buy out” at the end, buying your rented car at a price determined by the lessor when you start the lease. That is called the surplus price. But if you don’t buy it, you won’t retain any interest in the car. When the dealer resells it, you don’t get any profit (if any) – in other words, you don’t keep any equity in the car.
Leases are typically three years (36 months) long, although longer and shorter leases may be available.
What is an end-of-term lease?
That’s the specific term for the type of lease described above, and it makes up the majority of leases used by the average consumer. In this type of lease, you can “walk away” from the car at the end of the lease once you’ve paid all of the end-of-lease costs, such as travel and mileage.
This is good for consumers because sometimes cars depreciate faster than expected. If that happens, it’s basically not your problem anymore. The lessor made a small bet when they calculate residual value and is lost. You can leave. And if the actual value of the car is more than its residual value, you can always opt to buy it and that could be a smart move for you. But the point is, you have the choice to do one of two things, so there’s no obligation to buy and no liability if the car is worth less than people initially thought.
So if there is a closed lease, there must also be an open lease. What is this?
Here’s the short answer: Unless you’re buying a bunch of vehicles for a large corporate fleet, such as trucking company, you don’t need to worry about it.
Now I’m really curious. So spill it.
Want the long version? OK, you asked for it.
An open lease is a contract in which the lessee (say a business – these are not available to the public) agrees to take a financial risk on the value of the vehicle at the end of the lease in exchange for much more flexibility overall. There is an agreement on how much it will devaluation ahead of time and the parties set a minimum lease term, usually 13 months, but lease terms vary by plan. The company accountant knows all the costs of the lease up front, something you can’t do with the end-of-term lease. There’s no set term beyond the minimum – the company can keep the vehicle for as long as it’s needed or until its useful life expires. And there’s no mileage limit, because the lessor doesn’t care: Whatever the lessee does with the car, they’ll be responsible if there’s a difference between the residual contract value and the market value. reality.
That’s because at the end of the contract, the lessor sells the car if the lessee doesn’t buy it. If the vehicle is sold for more than its residual value, because the lessee has taken great care of it or used it inadequately, the lessee will receive a “profit” – technically, they will be refunded. money back. It’s like a bonus for being an exceptionally good asset manager. But if the car is in good condition and is actually used and is sold for less than its residual value, the lessee must pay the lessor the difference. This means the lessee accepts the risk. Compare this to an expired lease, where the lessor incurs the difference because the tenant can walk away without caring about the car anymore.
Taking a step back, you can see the versatility of this type of rental. There are no mileage limits and no set terms which means that if a change is needed – say the company needs a larger or smaller vehicle, or you need to downsize the fleet – you can just end up rental contract. As long as the car’s value at the end of the lease fits its agreed-upon depreciation curve, that shouldn’t be a big deal. And if you regularly book a large number of kilometers for your car, this type of rental avoids a bunch of expensive mileage fees.
So there is a conceivable situation in which another casual business buyer might consider this type of lease – remember, this lease is not intended for the consumer to use the vehicle for non-commercial purposes. Let’s say you’re an independent contractor who needs a sturdy truck to drive anywhere, anytime. You don’t want to take full ownership of the vehicle for business reasons, but a term lease may make sense in your situation. But remember, you will be exposed to value-related risks whenever the lease ends. If it’s less than the value agreed upon at the start of the lease, you’ll need to pay the lessor in full – by paying them the difference. That kind of risk is generally easy for large companies, but harder for individuals less able to absorb unforeseen financial risk.
I’m sorry I asked.
Hey, there’s a small chance this will win you a few points on a quiz night, right? The bottom line is that if you’re not a fleet manager, open leases aren’t really worth knowing about. But if you want to know more about traditional vehicle rental, we have plenty of resources to get you up to speed right here.
