Alpha Leasing Company
Part 3: Types of Leases
There are two basic types of leases
While leases come in a variety of shapes and flavors, there are two basic types of leases, closed-end and open-end.  There's a major difference between the two types and you need to understand this difference before entering into a leasing contract.

Leasing Tutorial Left Include
What is Leasing?
Who Should Lease
Types of Leasing
Should You Lease?
Buying Vs. Leasing
Benefits
Taxes and Fees
Lease Contracts
Negotiating the Deal
What Happens at the End
Closed-End Lease - In a closed-end lease, the residual is set in advance and is guaranteed by the lessor.  At the end of the lease, the lessee has the right to simply return the vehicle to the lessor and "walk-away." 

The majority of consumer leases are closed-end leases.  Prior to signing a closed-end lease, the lessor estimates the value of the vehicle at the end of the lease-term, and sets the residual value.  The lessee can either turn-in the vehicle at the end of the lease, or purchase the vehicle for the residual amount.

If the actual value of the vehicle at the end of the lease period is less than the residual, the consumer just turns in the keys and the lessor eats the loss on the vehicle. If the value of the vehicle at the end of the lease is greater than the residual, then you can still purchase the vehicle for the residual amount.  You can then either keep the vehicle or sell it and keep the profit.  Being able to participate in any upside, while being protected from any downside is a major advantage of leasing.  We discuss this topic in detail in the Leasing as a Hedging Strategy section of our website.

Open-End Lease - In the open-end lease, the lessee, not the lessor takes all of the financial risks at the end of the lease.  At the end of the lease, the lessee can either purchase the vehicle for the amount of the residual, or can return the vehicle and pay any difference between the actual value of the vehicle and the residual. 

The majority of open-end leases are commercial leases.  Annual mileage on a business lease is often-times greater than the mileage on personal automobiles, and the wear-and-tear can be significantly higher.  Thus, the actual value at the end of the lease period is harder to estimate, and the lessor is unwillingly to underwrite this risk. 

Open-end leases typically have a lower residual than closed-end leases, trading off higher payments for less risk of a significant loss at the end of the lease-term.  Businesses use open-end leases to gain the financial and tax advantages of leasing.  In most cases, open-end leases are not appropriate for consumers.

Part 4:  Should You Lease?

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