Closed End Lease

A Closed End Lease is one of the two main forms of a car lease today; the other being an open end lease.  Closed end leases are sometimes referred to as "walk away" leases because it allows the consumer to walk away at the end of the lease without the risk of any additional payments.

Closed end leases are based on the fact that leasing companies are able to predict, with a high degree of certainty, what a car is worth at the end of a lease.  They can also control the amount of expected wear and tear on a car through an excess mileage charge.  This charge counteracts the lower residual value of a higher mileage vehicle.

When a leasing company calculates the monthly lease payment, they estimate the value of the car at the end of the lease.  If the car is worth less than the residual value, then the leasing company takes the financial loss with a closed end lease.  If the car happens to be worth more than the residual value, the leaseholder usually has the option of buying the car.  Under these circumstances, the buyer of the car should then be able to sell the car at a profit.

Federal regulations require the lease type be clearly marked on all contracts.