Open vs Closed Lease/Nov 13, 2018
What is the difference between an open vs. closed lease?
If you’re considering leasing a vehicle in the foreseeable future, it’s important to determine what type of lease is right for you. For those who aren’t aware, there are two main types of leases: open-end and closed-end.
Read below to find out a little more about each:
Open-end leases allow the lessee (the one who borrows the vehicle) to guarantee a value at the end of the lease. This is called the Guaranteed Residual Value (GRV) and is outlined in the lease contract. The lessee has the option of purchasing, selling or trading-in the leased vehicle at the end of the contract for the GRV provided the car is worth at least that amount.
If the market value of the vehicle is less than the GRV at the end of the lease, the lessee is responsible for the difference, whether they plan to buyback the vehicle or return it to the lessor. For instance, if the GRV is $10,000 and the market value of the car is only $8,000 at the end of the contract, the lessee will be responsible for paying the difference of $2,000.
In return for bearing the financial risk of the lease, the lessee typically pays a less expensive rate and doesn’t have to worry about a mileage restriction.
Closed-end leases are designed to put the cost of depreciation onto the lessor, instead of the lessee. Instead of negotiating a GRV, customers have the option of either returning the car at the end of the lease (assuming it’s in good standing) or buying it back from the lessor.
However, the lessee is responsible for paying for any damages at the end of the lease that go beyond normal wear and tear. Note: normal “wear and tear” is typically more stringent with a closed-end lease compared to an open-end lease.
Most closed-end leases also have mileage restrictions between 16,000-24,000 kms per year. If you exceed this limit, you will be forced to pay a fee at the end of your lease. If you go over by a lot, you could end up paying a good chunk of change.
Which lease option should you choose?
If you spend a lot of your day inside your vehicle, an open-end lease is likely the better option for you. You won’t have to worry about surpassing the mileage limit and it can be a cheaper alternative as long as the vehicle doesn’t depreciate more than the GRV.
However, the majority of consumers still prefer closed-end leases as they’d rather put the financial risk onto the lessor. As long as you take good care of the vehicle and don’t exceed the mileage limit, you won’t have to worry about paying a lump sum at the end of the lease contract.