November 2007, Business Fleet - Feature
Open vs Closed End Leasing: Which Is Right For You?
Closed-End Lease (aka Net, No Risk or Walk-Away Lease) - There is a fixed rate and term, usually 12 to 48 months. The lease agreement will only show the monthly rental amount, and not the rate factors involved over the lease period. Rate factors are calculated using the average outstanding balance over the full lease term, as opposed to the "step down" method in TRAC leasing.
- Lessor sells used car at lease-end for market value. Lessee/employee may purchase at a price set by lessor.
- The lessor is responsible for gain or loss on resale, although provisions for a percentage of gains or losses between lessee and lessor may sometimes also be available.
- The lessor establishes depreciation factor.
- The lessor can influence choice of make, model and equipment to enhance residual value for the client, though the lesee has final say.
- A closed-end lease is rate-sensitive by make, model and lease term, with prime consideration being the vehicle's residual market value.
- A closed-end lease traditionally has preset mileage restrictions over lease term (usually 12,000 to 15,000 miles annually). The lessee is responsible for excess mileage charges that can vary from $.10-$.15 per mile or on a graduated scale, i.e., $.05 for first 200 miles, $.15 for all additional mileage.
Anticipated higher mileage may be "purchased" at lease inception with cost added to monthly payment, or a graduated allowance may be available. Some lessors will write closed-end leases with no mileage restrictions.
- The lessee is responsible for excessive wear and tear as well as early termination penalties.
Narrowing Your Decision
Those terms and conditions are a lot to digest, but you can narrow your decision by filtering your own fleet profile through three "big picture" parameters.
1. Understand Your Fleet Usage and Driving Patterns
Defining how you use your fleet is the first step to defining your lease type. Do your sedans stay relatively damage free, or do your trucks and vans get banged up on the job? Do you drive set routes, and a set number of miles per year? Do you put a lot of miles on your fleet vehicles?
Is turning over your fleet every three years important to you, or do you plan to run them until they "drop?" Fleets that are subjected to rough usage and incur high mileage are better suited for open-end leases.
"The greater the percentage of the vehicle's life that is going to be consumed by the fleet, the greater the likelihood it'll be an open-end lease," says Jack Leary, president of Motorlease. "Consuming 50 to 60 percent of a vehicle's life, the client would probably be on a closed-end lease. Consuming 95 percent of vehicle's life, the client is better on an open-end lease."
On the open-end lease, the lessee will use up, and pay off, a great percentage of those vehicles' useful lives, so their residual values at end of term are less of a factor. The lessee will often pay off these vehicles down to a dollar and leave them on the fleet management company's books, who will continue to handle the vehicle's taxes, licensing and management reporting.
Fleets with passenger vehicles that run predictable yearly mileages, such as sales reps, are better candidates for closed-end leases. Wear and tear is more predictable, and the lessor can more definitively match the pre-set mileage cap to the driving pattern.