Open End vs Close End Leases: All You Need to Know
The concept of commercial vehicle leasing involves an organization leasing one or more vehicles, for a fixed amount of time, at an agreed amount of money. The monthly payment is calculated by assessing the vehicle’s value by the end of the lease term – this is referred to as the residual value. There are two types of leasing, open-end and closed. Each type has its own benefits which can be dependent on which option works for your organization.
Learn more below.
Open-End Leases
Open-end leases are a popular option due to their flexibility. This leasing option allows the opportunity for an organization as close to owning the vehicle without purchasing it outright. Generally, terms for an open-end lease include a fixed length of time (usually 12 months), followed by a month-to-month lease structure with no restrictions on mileage or penalties. After the minimum lease term has been met, vehicles can be returned or remarketed.
Benefits and Considerations of an Open-End Lease
- This option is good for organizations whose fleet needs constantly change (project size, additional vehicles needed, etc.)
- Heavy-duty usage can often affect the value of the vehicle, as it includes using vehicles to haul objects (constant wear and tear) or modifying the vehicle (adding equipment, load) for projects. An open-end lease helps avoid additional fees if usage includes utility vehicles, light to medium-duty vehicles or special equipment.
- Great for heavy and rough usage. In open-end leases, there aren’t set limitations around damage, making it easier for projects of high mileage, heavy loads, and off-road conditions.
With this lease option, it is important for organizations to know that they will be responsible for the book value of the vehicle – market vs. residual. When organizations consider open-end leasing, there is potential to owe money or receive compensation at the end of their term. This is known as the Terminal Rental Adjustment Clause (TRAC).
Close-End Leases
Close-end leases are like most retail vehicle leasing programs – structured with set lengths, ranging from 12 to 72 months. At the end of the leasing term, organizations can return the vehicle or purchase for a set value. Organizations will not have to pay more than the agreed payments unless there are fees for excessive mileage and damage. In this structure, the leasing organization assumes the vehicle’s depreciation risk and will be responsible for the difference between the market value upon return and the residual value.
More Benefits and Considerations of a Close-End Lease
- Closed-end leases are a great option for organizations that have stricter budgets and consistent needs, such as:
- Steady and predictable daily operations
- Set estimate of driver mileage*
- Little or average wear from vehicle usage
*Based on the lease agreement, there may be additional mileage options available to provide flexibility for organizations.
