Closed-End Lease

Definition

A closed end lease is one of the two main types of car leases available today; the other being an open end lease.  With this type of lease, the lessor and lessee agree on the residual value of the automobile.  A closed end lease, also known as a "walk away" lease, allows the lessee to walk away at the end of the contract; without the risk of making any additional commitment to purchase.

Explanation

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 an agreement (residual value).  They can also control the amount of expected wear and tear on an automobile through an excess mileage charge.  This "per mile" fee 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 contract's term.  If the car is worth less than this residual value, then the leasing company takes the financial loss with a closed end lease.  If the market value of a car is higher than the residual value, the leaseholder 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.

Related Terms

open end lease, residual value, mileage charge