An open-end lease is a contract in which the amount owed at the end of the lease is the difference between the residual (projected) value of the property leased and its realized (actual) value.
Open-end leases are commonly used with vehicle leasing, particularly for business leasing purposes. For individuals, closed-end leases, which do not hold lessees responsible for additional depreciation beyond what is expected, are more common. Understand more about what open-end leases are and how they compare to closed-end leases so you can determine if it’s the right fit for you.
Definition and Example of an Open-End Lease
An open-end lease is a contractual agreement between a lessor (owner) and a lessee (renter) in which the final payment is based on the difference between the residual (projected) value of the property leased and its realized (actual) value.
The base monthly payments of the open-end lease agreement are determined based on the lessor’s projection of the vehicle's future value. But if that estimation is off, the lessee is responsible for the difference. They may get a refund or owe money, depending on the market value of the car at the time the lease ends.
- Alternate name: finance lease
Businesses may prefer open-end leases for vehicles because these contracts often come with more flexible mileage terms. Some may have unlimited mileage, while others may have set terms. In contrast, closed-end leases usually have mileage restrictions of between 10,000 and 15,000 miles per year.
For example, a delivery company may choose an open-end lease for multiple trucks to operate its business because it may not have a good estimate of how many miles it expects to log. With a closed-end lease, the company could face higher penalties for going over mileage limits.
Open-end leases are not as common for individual consumers as closed-end leases. With closed-end leases, consumers can avoid facing a balloon payment to cover any additional depreciation once the lease ends, although they may be responsible for other payments, such as costs for excessive wear and tear.
How Does an Open-End Lease Work?
When accepting an open-end lease, you essentially agree to make a balloon payment if the vehicle's depreciated value is more than what was estimated as the residual value. If the actual value of the car is greater than the residual value, you would receive a refund when the lease ends.
Taking on this type of lease agreement could present a problem for individual consumers. The biggest concern is that if there are excess miles or any damage to the vehicle, you risk overpaying because the value could depreciate more than expected by the end of the lease.
With an open-end lease, you are promising to be responsible for the value of the vehicle and pay any depreciation your monthly payments did not cover. That amount depends on the vehicle's actual fair market value at that time. If the vehicle's value is higher than predicted by the end of the lease, you could get a refund.
The Consumer Leasing Act entitles you to receive meaningful and accurate disclosure of lease terms before you enter into any contract.
Let’s look at an example. Suppose you lease a new car worth $30,000. Your monthly payments for the open-end lease are based on the projection that the vehicle will be worth $15,000 at the end of the contract.
If the car ends up only being worth $10,000 at the end of the lease, you will be obligated to pay for the lost $5,000 of depreciated value. On the other hand, if it’s worth more $20,000, you may be entitled to a $5,000 refund from the lessor.
Do I Need an Open-End Lease?
Once the lease ends, you are not the vehicle owner. What happens when the contract ends depends on the provisions stated within the lease. You may have the following options:
- Return the vehicle and pay any depreciation balances or receive any refund, if applicable.
- Arrange to have the vehicle repaired if any damages exist before returning the vehicle.
- Extend the lease if the lessor agrees.
- Opt for re-leasing the vehicle for a new term if allowed by the lessor.
- Purchase the vehicle.
- Arrange for a third party to purchase the vehicle if the lessor provides that option.
Most consumers who lease vehicles have closed-end leases, which do not require them to pay extra for additional depreciation.
Individual consumers who want an open-end lease—if they can even find that option for individuals—may want unlimited mileage on the vehicle without penalties, or they may only want to use the vehicle for a short time.
Open-End Lease vs. Closed-End Lease
For the most part, both the open-end lease and the closed-end lease operate in the same way throughout the life of the contract. They both calculate your monthly payments based on the car’s projected depreciation value at the end of the lease.
Additionally, the lessor and the lessee agree on how long the contract will last, ranging from a few months to a couple of years. The main difference is what happens when the lease ends.
With a closed-end lease, or “walk away” lease, you are not responsible for its value. However, you may be held responsible for the condition of the vehicle (meaning any excessive wear and tear) and the mileage.
A closed-end lease often makes the most sense for individual consumers who mainly go back and forth to work and home, staying within mileage limitations with normal wear and tear on the vehicle.
In an open-end lease, you are responsible for the value of the vehicle, meaning you pay any deficiency between the realized value and the residual value. With an open-end lease, the value of the vehicle at the lease’s end determines how much you will pay or receive in a refund. An open-end lease can be ideal for businesses that want more flexibility with mileage.
- An open-end lease is a contractual agreement between a lessor (owner) and the lessee (renter) that holds the lessee responsible for the value of the property.
- The final payment of an open-end lease is based on the difference between the residual (projected) value of the property leased and its realized (actual) value.
- The monthly payments and final payment of an open-end lease are based on the property's projected value at the end of the lease.
- An open-end lease may require a balloon payment at the end of the contract, or it may provide a refund.
- A closed-end lease is a more common leasing option for individual consumers.