There are two broad types of commercial leases: closed end and open end. Each type has its own rules and parameters and each suits different fleet situations.
Put simply, an open end lease is where the lessee takes on the deprecation risk and a close end lease sees the lessor assume the risk. Open end leases tend to have more flexible terms than the more restrictive closed end lease.
But which is best for your situation?
Sometimes also called a finance lease, an open end lease allows the lessee to set the service life or a vehicle, usually after a 12-month minimum term. After the initial term, the lessee can terminate the lease whenever they like without incurring a penalty.
During the lease, depreciation is calculated at a pre-determined rate based on the usage and type of vehicle. The lessor accepts the depreciation risk. When the vehicle is sold, a book value is set which is equal to the capitalised cost less the accumulated depreciation. If the vehicle reaches a price above the book price, the lessee keeps the difference. If it sells for less than the book price, the lessee must pay the difference.
For more information on book prices and car valuations, visit.
Closed End Leases
Also known as walk-away no-risk and net leases, close end agreements last for a fixed term and use a fixed rate. Typical terms are from 12 months to 48 months.
The lessor will then sell the vehicle at the end of the lease at market value. The employee or lessee may purchase the car at that set price. The lessor sets the rate of depreciation and keeps any gains and accepts any losses.
Usually, mileage is restricted to 12,000 to 15,000 miles per year and excess mileage charges apply.
The lessor is liable for early termination penalties and excessive wear.
So Which Is Best?
First of all, you need to ask yourself a series of questions about your fleet. Do your vehicles get damaged or stay relatively pristine? Can you predict the mileage they will travel in a year or does it vary? Do you tend to put a high mileage on your cars?
Will you run your vehicles until they drop, or do you like to turn them over every few years?
If you are unsure which type of lease you need, why not ask the experts? For example, Leicestershire car leasing company, totalmotion are one of the market leaders in fleet management and vehicle leasing.
It is also worth remembering that there are special VAT rules for car purchases and leases.
In summary, vehicles that get rough treatment and do lots of miles are more suited to open end leases, as are vehicles that you intend to run as lease vehicles for most of their lives.
Passenger fleets that accrue predictable mileages, such as those used by sales reps, are usually better suited to closed end leases. There’s also less chance of the vehicles becoming damaged, and the annual mileage level can be set by the lessor to match the current driving pattern.