Understanding Auto Leasing: Part 1 – Types of Leases

negotiating a dealIf you have decided to lease a car, your next step is to educate yourself about auto leasing as much as possible before you try to negotiate a lease deal. If you know what you are talking about going into a lease negotiation, you are much less likely to become confused or intimidated, and will then be in a much better position to get the deal you want. This knowledge base should definitely include an understanding of the types of vehicle leases you may come across. Don’t worry — there are only two you need to know about!

Two main types of car leases are available through dealerships for personal consumer use. The two varieties are the closed-end lease and the open-end lease. What is the best kind?

Closed-end Lease Agreements: The One You DO Want

Closed-end contracts are often referred to as “walk away” leases. With a closed-end lease, you are allowed to easily return the vehicle at the end of the agreed leasing period with no other obligations, except for the payment of disproportionate damage or going over mileage, if applicable.

Most lease contracts assume that you will drive around 12,000 miles annually, and that you will not drive the car aggressively or abuse it in any way. So, the prediction is that the car’s residual value is typically estimable. The residual value, which is what the vehicle is worth when you return it, is pre-estimated by the dealer. In a closed-end lease, if the vehicle is worth less than the estimated residual value when you return it, you are not responsible for making up the difference. The dealer or the leasing company is responsible for this financial obligation, not you.

Open-end Lease Agreements: The One You Do NOT Want

In an open-end lease, you take a lot of financial risks. Many businesses go for open-end leases, since the costs can be counted as business expenses. With this type of lease, you have to pay the difference between the estimated residual and the vehicle’s real market value upon the termination of the lease. This can add up to be quite a bit of money if you have put a lot of miles on the car, or if the car’s market value has decreased.

Remember To Read the Lease!

Most lease agreements clearly state at the top whether it is a closed-end or open-end contract, so make sure you actually read it to find out. As for reading lease contracts, they do have a lot of confusing leasing company language and vocabulary, which will be discussed in our next installment on the details of lease contracts.

February 18, 2013 by Jamie Rettig