Leasing a car is a popular way for young drivers to obtain a new vehicle at a lower monthly price than buying a new car. There are two leasing options you can choose from: closed end and open end. Selecting the proper lease agreement typically depends on how much you plan to use the vehicle and how many miles you expect to drive during the lease term.
Monthly payments on a closed-end lease are usually less than those on an open-end lease. The difference in payments is based on how much a vehicle will potentially depreciate while you have use of the car. Closed-end leases limit how many miles can be put on a vehicle during the lease term. These provisions help maintain the car’s residual value so the company that leased it to you can sell it when you turn it back in and make a profit. With open-end leases, the value of the car is much less due to expected high usage, and the leasing company cannot make as much when it is turned in and sold.
Closed-end leases normally allow you to drive 10,000 to 12,000 miles per year. If you go over the agreed-upon mileage limits, you may be liable for an additional per-mile charge at the end of the lease. For example, a lease agreement might specify that if you drive more than the maximum amount of miles allowed in an agreement, you’ll be charged 20 cents for each additional mile. Driving 3,000 miles over the limit would result in an additional charge of $600. Open-end leases don’t have limited miles and you wouldn't face any additional charges based on how many miles you drove the car.
Another potential concern when using a closed-end lease is the wear and tear on a vehicle. You will usually receive a vehicle that is in good shape, and the leasing company wants it returned that way. Using the vehicle to move objects or transport a lot of people can add to wear and tear. A charge is normally assessed to repair damages or cover wear if the vehicle was not properly maintained. An open-end lease usually does not have this provision.
A closed-end lease allows you to return the vehicle at lease end, pay any extra charges and walk away once the lease expires. You can also choose to purchase the vehicle if you have the money or can qualify for a loan. Open-end leases generally require you to pay the difference between the residual value of the vehicle and the fair market value when the vehicle is returned. This difference could be substantial if the vehicle was heavily used and now has a low residual value.
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Griffith Pritchard served as a senior branch manager and banking officer for M&T Bank. He specialized in small business and personal financial, credit and banking products. He also has extensive experience in small business sales and non-profit management. Pritchard is a graduate of Hobart College.