The 2 Different Types of Car Leases

There are two different types of leases, closed-end and open-end. To make a long story short, the vast majority of leases are closed-end leases, and this is what I recommend you get. Let's explain the differences and the benefits of each.

Closed-End Leases

Also referred to as "walk-away" leases, this is the type of lease that most car shoppers get. It allows you to return your vehicle at the end of the lease and not be responsible for anything other than excessive "wear and tear" and mileage charges.

In preparing a closed-end lease, the leasing company tries to predict what the vehicle will be worth at the end of the lease based on historical data and industry guides (this is called the residual value). Your monthly lease payment will reflect whatever residual value the leasing company assigns to your vehicle.

But things don't always work out as planned. Sometimes the car is worth a lot less than predicted and the leasing company will take a financial hit when you return the vehicle. This is a huge benefit to closed-end leases, but there's more...

Another benefit is the vehicle could actually be worth a lot more than the predicted value. In this case, you can take advantage of the purchase option and buy the vehicle at below market value, then turn around and sell it for a profit.

Open-End Leases

Open-end leases are usually used for commercial business leasing and is not recommended for consumers. In this type of lease, you're responsible for the value of the vehicle at the end of the lease.

If your monthly payments were not sufficient enough to cover the predicted depreciation, you are on the hook for the difference - which could be as high as several thousand dollars.

So why would anyone even want to use an open-end lease? Mainly because business vehicles tend to use up a greater number of miles each year, so instead of paying mileage charges, they'd rather be responsible for the diminished value of the vehicle instead.

Although most consumer leases are closed-end, you still need to make sure your contract clearly states that it's a closed-end lease. There have been cases where people signed an open-end lease without realizing it (but like I said this is very rare).