Open-End Lease

Definition

An open end lease is one of the two main types of car leases available today; the other being a closed end lease.  With this type of lease, the lessee agrees to take financial responsibility for the difference between the calculated residual value of the asset and its actual market value at lease end.

Explanation

Because of the added risk associated with an open end lease, this arrangement is found more frequently in a business-to-business environment.  Federal regulations require the lease type be clearly marked on all contracts.  With an open end lease, the lessee (the entity responsible for making lease payments) assumes the risk for the value of the asset at the end of the lease.

If the asset is worth more than the calculated residual value, the lessee will gain from the agreement.  If the asset is worth less than the calculated residual value, the lessee will lose from the agreement.

Example

If the lease payments were based upon a residual car value of $15,000, and the actual value of the car at the end of the lease is $10,000, then the leaseholder would have to pay $5,000 at the end of the lease.  The reverse of this situation is also true.  If the car is worth $20,000 at the end of the lease term, then the leaseholder would be entitled to a payment of $5,000 from the leasing company.

Related Terms

closed end lease, residual value, capitalized cost, mileage charge