You’ve made the decision to lease your next vehicle. You may even splurge on the beautiful sedan you spotted on the way to work. But a smart car lessee knows that they have options when it comes to picking a lease. Once you decide on a leasing option, you’ll be taking your next ride in no time.
The different leasing options
Leasing a car can be great. Leases allow you to drive a new car every few years, may have lower payments than if you bought the car, and provide you all the latest safety features, bells and whistles. On the other hand, leases have mileage limits and other restrictions, and at the end of the lease, you don’t own the vehicle. But there are different leasing options out there, including closed-end leases, open-end leases, and single-pay leases, each with specific advantages and disadvantages.
With a closed-end lease, the most common car leasing option, you have a set term (and typically set mileage) for your lease and you have the option to purchase the vehicle during or at the end of the lease. For example, if you signed a three-year lease on October 3, 2022, you’ll make payments each month in exchange for the use of the car for the three-year term. When October 3, 2025 rolls around, your car must go back to the lot, unless you’ve been approved for an extension or purchase.
Advantage: You may benefit from the vehicle’s residual value, which is the value of the vehicle at the end of the lease according to the lease agreement. If the vehicle has a high market value at the end of the lease, you can buy it at its residual value, possibly a bargain compared to its current high market value. Or you may leverage its high value toward the purchase or lease of a different vehicle. If the vehicle’s residual value is more than the market value, the lessor, not the lessee, is responsible for any difference and potential loss.
Disadvantage: As is the case for most leases, there are firm restrictions involved and the vehicle is not yours to keep. Mileage is limited, you’re not allowed to modify the car, and at the end of the lease term, you must decide whether to return the vehicle, buy it, or enter into a new lease.
Open-end leases are less common in the marketplace and pose high risk to the lessee. In an open-end lease the vehicle’s residual value is set in the lease agreement as described above, but when the lessee returns the vehicle and it’s sold at auction, the lessee must pay the difference if the car sells at auction for less than the residual value. This could be a significant cost to the lessee.
Advantage: If the vehicle goes to auction and the lessor gets more for the car than the residual value, the lessee may be entitled to payment for the surplus.
Disadvantage: On the flip side, if the lessor gets less for the car than the residual value, the lessee will have to pay the difference. For example, if the car sells for $25,000 but the residual value was $30,000, the lessee owes the lessor $5,000.
Single payment leases
A single payment lease is when you pay all the monthly lease payments upfront, instead of over the term of the lease.
Advantage: Helps you save time in the long-term since you are not required to make monthly payments and gives you peace of mind knowing that your lease has already been paid in full.
Disadvantage: Paying off a potentially large lump sum means not having use of those funds for other purposes.
Picking the right leasing option
If you plan on buying your car at the end of your lease, or if you want to buy your next car instead of leasing, you’re now armed with key facts you need to make a more informed decision when it comes to car leasing options. Whether you choose a closed-end, open-end or single-pay lease, or if you’ve decided owning a car makes the most sense, the choices are many, and they’re all yours based on what’s best for you.