Open end lease versus close end lease – which one is more suitable for you.

Oct. 11, 2011 - PRLog -- Let’s start with the “Open-end” lease option first, this type of lease is typically used in the commercial business environment. This can include specialty vehicles, heavy equipments, even luxury vehicles depending on the leasing company. It will require you the “lessee” to make your regular monthly payment just like any other lease, however due to the fact the item been leased is relatively rare, therefore difficult to accurately predict their “fair market value” in 3 to 5 years. This type of lease will require you the “lessee” to pay for the difference between the fair market value and your “buy out” amount, some times also referred to as the “residual value”.

Let’s use a commercial vehicle for example. The brand new dump truck you just leased may have cost $200,000 when it was purchased. You are making a monthly payment of $2500 for 48 months which leaves you with a buy out amount of $80,000 (for simplicity sake I have rounded off the numbers without any interest rate or taxes depending on the territory). Assume the worst case scenario, your dump truck has significantly dropped in resell value due to economical, political, or financial reasons it is only worth $50,000 on the open market. In this case you as the lessee will assume the responsibility of paying out of your pocket $30,000 of unexpected expense. On the flip side of the coin if your lease equipment as appreciated in value, you will not be refunded any money.

Close end lease on the other hand is commonly used for the retail automotive industry. This type of lease is designed and structured towards the average consumer. A close end lease will guarantee the “buy back” or “residual” value. The fair market value is determined with market research conducted by the manufactures themselves along with the “blue book” and “black book” value. A close end lease will transfer majority of the risk on to the manufactures themselves rather than the “lessee”, which is more suitable for the average consumer.

A typical example of a close end lease would be a 2012 Honda Civic LX automatic sedan. A typical 48 month lease with 0 down would be $267 plus HST, with a residual value of $9905 plus HST at the end of the term. This is a quote based on Honda.ca as of October, 2011. With this type of lease the “lessee” can literally drop off the vehicle at the end of the term and walk away. Hence this type of lease is some times referred to as the “walk away” lease. Although this type of lease is much safer in comparison with the open end type however there are conditions and obligations you have to obey. The “lessee” will be held responsible for any excessive km, body damages, tires, windshield damage, assuming you have returned your leased vehicle in flawless condition. There should be no other charges that will apply.

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