Significant differences exist between the open-end and closed-end operating lease options. We can help you evaluate which commercial lease is right for your organization.
With an open-end lease, not all, but a significant degree of risks from ownership is transferred to the lessee. The total lease costs are unknown until the end of the lease term and the vehicle(s) under the lease are sold. And, if there are any gains or losses on the vehicle(s) sale, this is applied to the lessee’s account.
If a loss is incurred at the end of the lease term, it is treated as an additional payment, and the lease may be in jeopardy of meeting the criteria for an operating lease. In this case, the lessor needs to absorb a portion of the loss in order to keep the payments below 90% of the vehicle(s) fair market value. Due to the possibility of a significant loss, there are often provisions in the open-end contracts that bind the lessor to take steps and ensure the lease meets operating lease requirements.
Under this open-end lease agreement, there are significant risks that the lessee is exposed to from the swings in the used vehicle market, to the mileage and condition of the vehicle(s).
With the Closed-end lease structure, the risks of ownership remain with the lessor. The terms of the lease are fixed, based on the agreed upon mileage and condition of the vehicle(s) determined by the lessee’s usage. In the case where the vehicle(s) actual use is different from the lease terms, provisions usually allow for adjustments at the lease end, since the vehicle(s) residual value is based upon the assumptions of the vehicle(s) condition.
In most cases the closed-end lease provides improved cash flow for the lessee since they pay for only the difference between the vehicle(s) cost and the residual value, or actual usage of the vehicle(s).
At Merchants Fleet Management, we are more than a fleet leasing and management services company – we are your fleet management partner. Call us at 1-866-6LEASES or click here for more information and to talk to one of our experts today.