Closed-End Lease

AAA

DEFINITION of 'Closed-End Lease'

A rental agreement that puts no obligation on the lessee (the person making periodic lease payments) to purchase the leased asset at the end of the agreement. Also called a "true lease", "walkaway lease" or "net lease".

INVESTOPEDIA EXPLAINS 'Closed-End Lease'

Since the lessee has no obligation to purchase the leased asset upon lease expiration, that person does not have to worry about whether the asset will depreciate more than expected throughout the course of the lease. Thus, it is argued that the closed-end leases are better for the average person.

For example, suppose your lease payments are based on the assumption that the $20,000 new car that you are leasing will be worth only $10,000 at the end of your lease agreement. If the car turns out to be worth only $4,000, you must compensate the lessor (the company who leased the car to you) for the lost $6,000 since your lease payment was calculated on the basis of the car having a salvage value of $10,000. Basically, since you are buying the car, you must bear the loss of that extra depreciation. But, if you have a closed-end lease, you don't buy the car so you don't bear the risk of depreciation.

RELATED TERMS
  1. Fixed Price Purchase Option

    The right, but not the obligation, to buy a leased item at a ...
  2. Lease Option

    An agreement that gives a renter the choice to purchase a property ...
  3. Appraisal

    A valuation of property (ie. real estate, a business, an antique) ...
  4. Lease

    A legal document outlining the terms under which one party agrees ...
  5. Lessee

    The person who rents land or property from a lessor. The lessee ...
  6. Lessor

    The owner of an asset that is leased under an agreement to the ...
Related Articles
  1. Active Trading

    An Introduction To Depreciation

    Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
  2. Home & Auto

    New Wheels: Lease Or Buy?

    These two major ways to obtain a car have very different advantages and drawbacks. Find out which is best for you.
  3. Options & Futures

    Top 7 Most Common Financial Mistakes

    Choose fortune over disaster by avoiding these money traps.
  4. Chart Advisor

    Profit From Holiday Spending With This ETF

    As Americans finish purchasing the last of their holiday gifts, the consumer discretionary sector will continue to be one of the primary beneficiaries.
  5. Chart Advisor

    'Tis The Season For Food And Beverage Stocks

    The holidays tend to be a gift to investors in defensive consumer stocks. Here's a food and beverage sector ETF (and its top holdings) to consider
  6. Insurance

    Who are the best-rated auto insurance companies in the US?

    Learn which U.S. auto insurance companies have the best consumer ratings and who is eligible to purchase auto insurance from these companies.
  7. Savings

    How does a cost of living adjustment (COLA) affect my salary?

    Learn how employers add cost of living adjustments to workers' salaries to offset the effects of inflation or to aid in a lateral move.
  8. Savings

    What qualifies as "goods" in cost of goods sold (COGS)?

    Learn what qualifies as "goods" in cost of goods sold, or COGS, so you can keep an accurate record for your business' income statement.
  9. Savings

    What causes inflation, and does anyone gain from it?

    Learn how inflation affects what you pay for everyday items. Natural disasters, consumer confidence and corporate decisions all impact the sticker price.
  10. Savings

    Can I use a prepaid credit card to pay bills or to transfer money to other accounts?

    Learn how prepaid credit cards enable convenient bill payments and transfers. Explore different fees charged for such transactions.

You May Also Like

Hot Definitions
  1. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  2. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  3. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  4. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  5. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  6. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
Trading Center