Open-End Lease

What is an 'Open-End Lease'

A rental agreement that obliges the lessee (the person making periodic lease payments) to make a balloon payment at the end of the lease agreement amounting to the difference between the the residual and fair market value of the asset.


Also called a "finance lease".

BREAKING DOWN 'Open-End Lease'

Since the lessee must purchase the leased asset upon lease expiration, that person bears the risk that the asset depreciates more than was expected by the end of the lease. Of course, at the same time, the lessee stands to realize a gain if the asset depreciates less than expected.

For example, suppose your lease payments are based on the assumption that a $20,000 new car 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. Conversely, if the car is worth more than $10,000 at the end of the lease, you receive a refund from the lessor.

RELATED TERMS
  1. Closed-End Lease

    A rental agreement that puts no obligation on the lessee (the ...
  2. Walk-Away Lease

    A common type of car lease in which the lessee returns the car ...
  3. Bargain Renewal Option

    A clause in a lease agreement that gives the lessee the option ...
  4. Bargain Purchase Option

    An option in a lease agreement that allows the lessee to purchase ...
  5. Minimum Lease Payments

    The lowest amount that a lessee can expect to make on a lease ...
  6. Operating Lease

    A contract that allows for the use of an asset, but does not ...
Related Articles
  1. Investing

    How Does an Operating Lease Work?

    Operating lease is a term used mostly in accounting to denote a lease that gives the lessee rights to use and operate an asset without ownership.
  2. Managing Wealth

    What is a Capital Lease?

    A lease considered to have the economic characteristics of asset ownership.
  3. Personal Finance

    When Is Buying A Car Better Than Leasing?

    People who lease a car are often more concerned with the short-term picture.
  4. Retirement

    Retirees: Should You Buy or Lease Your Car?

    To buy or lease – that is the question. For retirees, access to safer cars, comprehensive warranties and tax deductions may drive up leasing's appeal.
  5. Personal Finance

    How Does a Lease Work?

    A lease is an agreement between two parties where the lessor owns property that it allows the lessee to use pursuant to terms of the agreement.
  6. Managing Wealth

    4 Ways to Get the Best Deal on a Car Lease

    Car buyers typically negotiate when purchasing a vehicle, but many don't negotiate when leasing a car. There are several ways to save if you ask.
  7. Personal Finance

    Who is a Lessor?

    A lessor is the owner of an asset that is leased.
  8. Personal Finance

    Auto Leasing Hits Record High in Q4

    Auto Leasing is continuously growing in popularity as a preferred choice of financing.
  9. Personal Finance

    Auto Leasing Hits Record High in Q4

    On Thursday, Experian Automotive – a company that tracks financing options for new and used vehicles – released a report that highlights more consumers are leasing, rather than buying, new or ...
  10. Personal Finance

    Millennials Guide: How To Read a Lease

    Everything you need to know before you rent a home.
RELATED FAQS
  1. At the beginning of the year, ABC Corp. began to lease a major piece of equipment ...

    The correct answer is: A) Under the capitalized lease method, the lessee must treat the asset as if it was purchased with ... Read Answer >>
  2. How have low interest rates affected lease rates in the automotive sector?

    Find out how and why lower interest rates for leasing new automobiles have helped spur more consumers to lease cars instead ... Read Answer >>
  3. Why might a bond agreement limit the amount of assets that the firm can lease?

    Bond covenants can limit the amount of leases a company can have because leasing contracts are a form of debt. Taking on ... Read Answer >>
  4. What is the importance of residual value in an automobile lease?

    Find out how dealerships assign residual value and why this is an important factor in car leases. Learn about a tactic some ... Read Answer >>
  5. At the beginning of the year, HIJ Corp. began to lease new equipment ...

    The correct answer is: b) Total Lease Payment = Interest expense + Principal repayment Step 1: Interest expense = 8.5% of ... Read Answer >>
  6. You are currently reviewing the following information for JKL Corp ...

    Free info on financial certification exams including study guides, exam questions, and much more! Read Answer >>
Trading Center