What Is a Closed-End Lease?

What Is a Closed-End Lease?

Let me explain what a closed-end lease really is. It's a rental agreement where you, as the lessee making those periodic payments, have no obligation to buy the leased asset when the term ends. You might hear it called a 'true lease,' 'walkaway lease,' or 'net lease.' This setup means you can just hand it back and walk away.

Key Takeaways on Closed-End Leases

Here's what you need to know directly: A closed-end lease means no purchase requirement at the end, so you're off the hook for buying the asset. The terms are stricter than other options, but you avoid the risk of the asset depreciating more than expected. These leases, along with open-end ones, are mostly for vehicles. Expect a fixed rate and a term from 12 to 48 months.

Closed-End vs. Open-End Lease

You should understand the difference between closed-end and open-end leases, as there are typically just these two types. An open-end lease gives you more flexibility, but you take on the depreciation risk. In a closed-end lease, the lessor handles that risk, though the terms are tighter. Both are common for vehicle leases.

Since you don't have to buy the asset and won't stress over extra depreciation, closed-end leases often suit the average person better. Most consumer leases are closed-end, offering predictable monthly payments if you follow rules like mileage limits for cars. Open-end leases fit businesses with big fleets needing flexibility for high mileage.

Pros and Cons of a Closed-End Lease

Let's look at the advantages first. With a closed-end lease, you have no obligation to buy at the end, which keeps things simple. It provides predictability through a fixed rate and set term. Plus, you avoid anxiety over the asset depreciating more than anticipated.

On the downside, fees can be tiered, meaning you might pay a lump sum for the first few hundred miles over the limit, then per-mile charges after that. You're also on the hook for any excess wear and tear. And if you end the lease early, expect additional exit fees.

How Closed-End Leases Are Structured

Typically, these leases come with a fixed rate and terms from 12 to 48 months. If you want out early, you'll likely face extra fees. For vehicle leases, annual mileage limits are common, usually 12,000 to 15,000 miles. Go over that, and you pay penalties, often cents per mile beyond the limit.

Those fees might be structured on a graduated scale, with a lump charge for the initial overage and then per-mile costs. You're responsible for excess wear and tear too. At the end, the lessor might sell the asset at its depreciated value. You could still buy it, possibly with incentives for a better deal than others.

Example of a Closed-End Lease

To make this clear, consider an open-end lease first for contrast: If you're leasing a $20,000 car expected to be worth $10,000 at the end, but it's only worth $4,000, you cover the $6,000 loss because your payments assumed that $10,000 value. Essentially, you're buying it and bearing the depreciation hit.

In a closed-end lease, you don't have to buy, so no depreciation risk for you. But if the car's market value ends up higher than the $10,000 residual—say $14,000—you could buy it for $10,000 and sell for $14,000, pocketing $4,000. If buying outright appeals more than leasing, use an auto loan calculator to check potential terms and rates based on the car's price.