Leasing allows the business to pay for only the portion of the vehicles they use. This reduces the monthly payment when compared to financing a vehicle where you pay and finance 100% of the vehicle and pay tax on the total price.
Open-end leasing and closed-end leasing are two common types of leasing arrangements used by businesses to acquire vehicles. These two options differ in several key ways, primarily in terms of flexibility, cost structure, and responsibilities at the end of the lease term. Here's a breakdown of the key differences:
1. Ownership and Residual Value:
- Open-End Leasing: In an open-end lease, the lessee (the business) typically assumes more risk and responsibility for the leased asset. At the end of the lease term, the business is responsible for the difference between the estimated residual value (the expected value of the asset at the end of the lease) and the actual market value of the asset. If the market value is greater than the estimated residual value, the business receives the equity in the vehicle.
- Closed-End Leasing: In a closed-end lease, the lessor (the leasing company) assumes the risk of the asset's depreciation. At the end of the lease term, the business can return the asset without further financial obligations, even if the market value is less than the estimated residual value.
2. Mileage Restrictions:
- Open-End Leasing: Open-end leases typically do not have strict mileage restrictions. Businesses have more freedom to use the leased asset as they see fit without incurring significant excess mileage fees.If a business knows they will put 50,000 miles on a vehicle a year, the lease is written accordingly to account for the high use. This avoids any surprises at the lease end.
- Closed-End Leasing: Closed-end leases often come with predetermined mileage limits. Exceeding these limits results in excess mileage charges, which can be quite costly.
- Open-End Leasing: Open-end leases offer more flexibility in terms of customization and usage. Businesses can modify the asset or use it in ways that suit their specific needs. Customized upfitting such as ladder racks, shelving, and vehicle wraps can be built into the lease.
- Closed-End Leasing: Closed-end leases are typically more rigid in terms of usage and modifications. The asset must be returned in good condition, and modifications may be restricted.
4. End-of-Lease Options:
- Open-End Leasing: At the end of the lease, the business can often choose to buy the asset at its residual value, continue to lease it for a defined period, trade it in towards a new leased vehicle, or cash out and take any equity remaining.
- Closed-End Leasing: The primary option at the end of a closed-end lease is to return the asset. Some leases may offer the option to purchase the asset at a predetermined price.
5. Cost Structure:
- Open-End Leasing: Monthly lease payments for open-end leases are typically lower because the business assumes the risk of the asset's depreciation and final market value.
- Closed-End Leasing: Monthly lease payments for closed-end leases are usually higher, but they provide more predictability since the lessor absorbs the depreciation risk.
In summary, open-end leasing offers businesses more flexibility and potentially lower monthly payments. Closed-end leasing, on the other hand, provides greater predictability but higher monthly payments.
Fleet management companies are experts at structuring open-end leases that meet your needs. They work with the customer to understand their business objectives to determine what is most important. They understand the importance of setting realistic residual values based on your use, market conditions, and upfitting.