Closed-end leases, also referred to as true, walkaway or net leases, offer a rental agreement without requiring the lessee (or lease payer) to purchase the asset at the agreement's end. Two key types of leases exist - open-end and closed-end. An open-end lease offer flexibility, while placing depreciation risk on the lessee. Closed-end leases, on the other hand, have stricter terms but this risk is borne by the lessor. Generally, these leases are used for vehicles.
In a closed-end lease, lessees aren't obliged to purchase the leased asset when the lease ends, nor do they have to worry about unexpected depreciation. Therefore, it's often recommended for the average leasers. Typically used in consumer leases, a closed-end structure offers fixed monthly payments over the lease duration, granted the lessee adheres to lease terms, like making sure a leased car does not surpass its mileage limits.
Several benefits of a closed-end lease include no obligatory purchase at the end, predictability of payments, and less anxiety about asset depreciation. On the downside, lessees could face tiered fees for exceeding usage limits, unexpected expenses for asset wear and tear, and exit fees for early termination.
A typical closed-end lease agreement has a fixed rate and a term that usually lasts from 12 to 48 months. Accrued additional fees for early termination or over-usage are often unavoidable. For instance, vehicles procured through such an agreement usually have annual mileage limits between 12,000 and 15,000 miles. Lessees would then have to pay fees for the exceeding mileage.
Once a closed-end lease concludes, the lessor may sell the asset at its depreciated value. Lessees might be incentivized to purchase the asset at a reduced price. In the case of an open-end lease, if the value of the leased asset decreases more than expected, the lessee would have to compensate the lessor for it. But with a closed-end lease, this depreciation risk isn't borne by the lessee.
When deciding between leasing and buying, it is crucial to consider all costs, fees, financing options, mileage requirements and how long you intend to keep the asset.