The 2 Different Types of Car Leases
Let's explain the differences and the benefits of each.
Also referred to as "walk-away" leases, this is the type of lease that most consumers 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 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.
3 Steps Every Car Buyer Needs to Take to Save Maximum MoneyThe key to getting the best deal is to gather price or lease bids from as many local dealers as possible. Then shop that best price around until no one can beat it. Here are the steps:
Step 1 Get Prices From My Trusted NetworkSelect the vehicle you're interested in to see if there are local dealers in my network who will provide you with their best upfront price. You will get direct access to an internet sales manager who you can further negotiate with online (no need to visit dealership).
Step 2 Get Prices From TrueCar / CarsDirectTrueCar, and CarsDirect are my top 2 online price quote recommendations. These services show you pre-negotiated prices from dealers closest to you - and the deals are usually pretty decent. But remember, you can still negotiate further.
Step 3 Complete my ChecklistFollow this up with my checklist to make sure you squeeze out every last bit of savings.
- Gregg Fidan
Each week, I'll keep you up-to-date on the latest car deals and news that might affect your purchase. This includes...
- Best Rebates, Incentives, and Lease Deals
- Latest Car Buying Scams and Tricks
- The Best & Worst Time to Buy a Car
- Which Cars You Should Avoid