Open- vs. Closed-End Leases: The Details You Need to Know

Written by Ashley FranklinUpdated: 9th Mar 2022
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When you’re shopping for a car, you’ll likely come across two types of leases: open-end and closed-end.

But what do these terms mean? And which is the right option for you?

In this post, we’ll break down the details of open-end and closed-end leases, including how they work, the hidden costs of each, and when they might be a good fit so you can decide the best kind of lease for your needs.

Open vs. Closed-End Leases: Overview

Open-end leases and closed-end leases are two different ways of leasing a car. While both options use the car’s residual value to calculate your monthly payment, there are some critical distinctions between the two.

With an open-end lease, you’re responsible for the residual value at the end of thecar lease. This means that you could potentially owe more money than the car is worth when the lease is up.

On the other hand, you’re not responsible for the residual value with a closed-end lease. This means you can’t owe more than the car is worth, but you also can’t make any money if the vehicle is worth more than the residual value when the lease is up.

Which option is right for you depends on your budget and plans for the car. If you’re not sure which lease is right for you, contact a car leasing specialist for advice.

>> More: How to Lease a Car

What Is an Open-End Car Lease?

Open-end leases are typically less expensive than closed-end leases, but they also come with more risk. However, with an open-end lease, the terms are generally more flexible.

However, you’re responsible for the car’s residual value at the end of the lease. This means that you could potentially owe more money should your car depreciate beyond the estimated residual value.

For this reason, open-end leases are best for drivers who plan to keep their car for a shorter period of time or who are comfortable with the idea of taking on more risk.

How Open-End Lease Works

An open-end lease will come with flexible terms depending on your needs. The length of the lease, mileage limit, and amount of the security deposit are all negotiable.

At the end of the lease, you’ll owe the car’s residual value. This could mean you end up owing more if the vehicle has significant depreciation, so it’s essential to be aware of this risk before signing up for an open-end lease.

However, if the vehicle is worth more than the residual value, you can return it and walk away with some extra cash in your pocket.

>> More: Mistakes to Avoid When Leasing a Car

What Is a Closed-End Lease?

Closed-end leases are less flexible than open-end leases, but they offer more protection if you plan to keep the car for an extended period of time.

With a closed-end lease, you’re not responsible for the car’s residual value. Instead, you’ll only owe the amount stated in the lease agreement – no matter how much the car is worth at the end of the term.

This makes closed-end leases a good option for drivers who want more certainty about their monthly payments or who plan to keep their car for a longer period of time.

>> More: Can You Get Out of a Car Lease Early?

How Close-End Lease Works

Closed-end leases will include fixed terms and conditions, such as the length of the lease and the mileage limit.

At the end of the lease, you’ll return the car to the dealer and will not owe anything unless there are penalties for mileage overage or excessive wear and tear.

What Type of Lease Should I Get?

The best option for you depends on your budget and plans for the car.

For example, if you’re not sure whether you’ll keep the car for the entire duration of the lease, an open-end lease may be a good option for you. On the other hand, if you know you’ll want to keep the car for a few years or more, a closed-end lease is the better choice.

In general, if you require flexibility in your lease terms or will be driving very low mileage, then an open-end lease may be best for you. However, closed-end leases are a better option if you want more protection and don’t mind less flexibility.

No matter which lease you choose, it’s critical to read the terms and conditions carefully to avoid any surprises down the road.

Is an Open-End Lease an Operating Lease?

Open-end leases are a type of operating lease. With an open-end lease, the lessee has more freedom to terminate the lease early or modify the terms but is liable for the car’s residual value. Closed-end leases are not considered operating leases.

Are Open-End or Closed-End Leases More Expensive?

Unfortunately, there is no definitive answer to this question. It depends on a number of factors, including the state in which you live, the type of vehicle you’re leasing, and the specific terms of the lease.

Generally speaking, closed-end leases tend to be more expensive than open-end leases. Closed-end leases are more costly because they offer less flexibility for the lessee.

For example, if you end up driving more miles than you anticipated or need to terminate the lease early, you will have to pay expensive fees and penalties.

Both types of leases have their pros and cons, so it’s important to carefully consider what’s important to you before making a decision. Whichever lease you choose, be sure to read the terms and conditions carefully to avoid any surprises down the road.

In order to get the most affordable lease, make sure to consult with a car leasing specialist or your financial advisor to get specific quotes and advice tailored to your needs.

Bottom Line: Open vs. Closed-End Leases

So, what’s the bottom line?

Open-end leases offer more flexibility but have a higher residual value risk. On the other hand, closed-end leases are less flexible but provide more protection against additional penalties and charges.

While closed-end leases tend to be more popular with consumers, it ultimately comes down to what you need and what you’re comfortable with. Be sure to take into account your driving habits, the length of time you plan to keep the car, and your budget when deciding which lease is suitable for you.

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Ashley Franklin
Ashley Franklin

Ashley Franklin is a professional writer and financial literacy expert. Ashley double-majored in Computer Science and Communications, and she brings her talents to the forefront with writing about personal finance and investing. Having worked with renowned international websites and publications, Ashley has found that there’s no one-size-fits-all solution to financial management. That’s why her articles are all about finding what works for you.