Types of Auto Leases
Closed-End Lease. In a lease, you make the pre-determined number of
payments and then return the car at the end of the lease. With a closed-end
lease, provided there is no damage to the car beyond normal wear and tear or
excess mileage beyond that which was allocated, you have no responsibility for
the car's value at the end of the lease. The leasing company absorbs the loss of
value through depreciation in the car if it is less than the estimated residual
value. The risk is "closed" to you.
For example, you lease a new car for 36 months with a residual value of $8,300.
At the end of your lease, the car is only worth $7,900 - The lessor absorbs this
cost with a closed-end lease. You can walk away with no further costs, IF the
car is in good condition.
Open-End Lease. An open-end lease agreement is just the opposite in that
you take the risk. If the estimated residual value specified at the lease onset
differs from the actual market value at lease end - you absorb the difference.
As per the above example, you would pay all or a portion of the difference
between the $8,300 and $7,900, often called the "end-of-lease" or "end-of-term"
payment. The Federal Consumer Leasing Act provides protection for open-end
leases by limiting the end-of-term payment to no more than the total of three
monthly payments.
However, if the car happens to be worth more than the estimated residual value
at lease end, you receive all or a portion of the difference. If the auto is
worth more, the equity is yours and/or may be applied to your new lease. If the
market value or the amount the car can be sold for is close to the estimated
residual value you can walk away owing nothing. For most people, this is not a
practical risk to take. For the reason, close-end leases are more popular.
5Top
|
