Open-end lease

What is an open-end lease?

An open-end lease is a type of car lease in which consumer, or lessee, agrees to pay the difference between the fair-market value of the car and its residual value.

Deeper definition

An open-end car lease is one of the most common types of rental agreements. At the end of the agreed upon lease period, the lessee must make a balloon payment that is the difference between the fair market value of the asset and the residual value of the vehicle.

Most often, an open-end lease, also called a finance lease, places the risk on the lessee. During the timeframe of payments on the agreement, the borrower will pay significantly less than the cost of buying a car.

When the lease agreement is set to end, the lessor will pay for an appraisal on the vehicle or other asset. The lessee is then required to pay the difference between what they owe on the vehicle and its fair market value.

In some situations, the asset will depreciate more than was anticipated at the time that the lease was established. This would require the lessee to pay the difference. In some situations, a gain can occur because the asset depreciates less than is expected at the time that the lease is put into place.

Open-end lease example

A person comes to a lease agreement, which outlines what the assumed value of the asset will be at the time that the lease ends.

In this case, the vehicle starts out with a value of $20,000. It is assumed that the vehicle will be worth $12,000 at the time that the lease concludes.

However, when that lease agreement ends, the vehicle actually is only worth $8,000, based on an appraisal. The lessee will need to pay the lessor $4,000 in this case.

For those considering the purchase of a vehicle, the auto loan calculator at Bankrate.com can provide insight into monthly payment estimates.

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