Open Term Lease Versus Closed Term Lease: Which One Is Right For You?

Let’s start with the “open” lease option first, this type of lease is typically used in the commercial business environment. This can include specialty vehicles, heavy equipment, even luxury vehicles, depending on the leasing company. It will be necessary for you, the “tenant”, to make your regular monthly payment like any other lease, however, due to the fact that the rented item is relatively rare, it is difficult to accurately predict its “fair market value” in 3 to 5 years. This type of lease will require that you, the “lessee”, pay the difference between the fair market value and the amount of your “purchase”, sometimes also called “residual value.”

Let’s use a commercial vehicle, for example. The new dump truck you just leased may have cost $ 200,000 when you bought it. You are making a monthly payment of $ 2,500 for 48 months, which leaves you with a purchase amount of $ 80,000 (for simplicity, I have rounded the numbers without any interest rates or taxes depending on the territory). Suppose that in the worst case, your dump truck has significantly lowered the resale value due to economic, political or financial reasons, it is only worth $ 50,000 on the open market. In this case, you, as the tenant, will be responsible for paying $ 30,000 of unexpected expenses out of pocket. On the other side of the coin, if your leasing equipment appreciates in value, no money will be refunded to you.

On the other hand, the final lease is commonly used for the retail automotive industry. This type of lease is designed and structured for the average consumer. A closed lease will guarantee the “buyback” or “residual” value. The fair market value is determined with a market investigation carried out by the manufacturers themselves together with the value of the “blue book” and the “black book”. A closed lease will transfer most of the risk to the manufacturers themselves rather than to the “lessee”, which is more suitable for the average consumer.

A typical example of a closed lease would be a 2012 Honda Civic LX automatic sedan. A typical 48-month lease with a leading 0 would be $ 267 plus HST, with a salvage value of $ 9,905 plus HST at the end of the term. This is a quote based on October 2011 Honda.ca. With this type of lease, the “renter” can literally leave the vehicle at the end of the term and drive away. Therefore, this type of lease is sometimes called a “retirement” lease. Although this type of lease is much safer compared to the open-ended type, there are conditions and obligations that you must meet. The “renter” will be responsible for any excessive mileage, bodily harm, tires, windshield damage, assuming he has returned the rented vehicle in perfect condition. There should be no other fees that apply.