When thinking about leasing a car, a lot of people ask themselves one question: should I lease, rent, or buy? Leasing, buying, and renting a car are all very different processes. Car leases and purchases are both methods of auto financing – with leasing, you’re paying to drive the vehicle for a certain amount of time (often two or three years), whereas buying entitles you to actually own the vehicle.
Cars leasing is advantageous to drivers that prefer new vehicles, are unsure of their long-term vehicle needs, and/or do not want to deal with the hassle of selling their cars later on. Alternatively, buying is perfect for drivers who are more concerned with long-term costs and needs. Renting a car is something different altogether. Unlike buying and leasing, whose costs are largely determined by set factors such as the vehicle’s market value and expected depreciation, rental expenses do not follow a definite formula. Thus, renting a car is generally not cost-effective, and is only recommended for short term use (less than one year – ideally just a couple of days).
If you’ve decided to lease new cars, you might think you’re done asking yourself questions, but here’s one more to consider: Do I want closed-end or open-end car lease deals? Open- and closed-end leases are the two primary types of car leasing deals. Closed-end leases are more financially beneficial to the lessee, while open-end leases protect the leasing company.
Before going any further, it’s important to remember one important concept of leasing a car: residual value. In car leases, a vehicle’s residual value represents its predicted worth at the end of the lease. A $20,000 car with a 50% residual percentage after 24 months, for example, would have a residual value of $10,000. In this case, the lessee would agree to pay the difference – $10,000 – plus the appropriate fees.
To predict a car’s residual value, car leasing companies look at the history of the vehicle’s make and model, in addition to factoring in the duration of the lease and the expected mileage. Therefore, the residual is an estimation – not a sure thing – meaning that at the end of the lease the vehicle could be worth more or less than anticipated.
Now, let’s discuss the difference between open- and closed-end leases. Closed-end car lease deals are also known as “walk-away” leases, because they allow the lessee to simply walk away at the end of the lease, regardless of the car’s actual value. The lessee will only have to pay for damages and/or extra mileage as stipulated in the contract. In an open-end lease, however, the lessee must cover the difference between the final worth and the forecasted residual.
Let’s consider the $20,000 New York lease mentioned above. Although the residual value after 24 months is $10,000, it’s possible that the car will be worth a lesser amount, such as $9,000. In this case, the vehicle’s worth will have decreased by $11,000, even though the initial lease was only set for $10,000. In a closed-end lease, the Brooklyn cars leasing company absorbs this cost, however open-end leases require the lessee to pay for the extra $1,000 of depreciation.
What about if the car is worth more than expected at the end of the lease? In closed-end car leasing deals, the lessee can choose to purchase the vehicle at the residual price (as long as the contract included an option to buy). So, if the car wound up worth $11,000, the lessee could buy the vehicle for $10,000, then sell it for $11,000 to profit.