DEFINITION of 'Closed-End Lease'

A closed-end lease is 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."

BREAKING DOWN '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 do not have to buy the car so you do not bear the risk of depreciation.

How Closed-End Leases Are Structured

Typically, a closed-end lease comes with a fixed rate and a term that may run 12 to 48 months. The lessee might want to terminate the agreement early – a move that often incurs additional fees for the early exit. For vehicles procured through such an agreement, there are often annual mileage limits that tend to range from 12,000 miles to 15,000 miles. If the use of the vehicle exceeds those limits, the lessee is then responsible to pay additional fees. Those fees can be based on a set cents-per-mile penalty over the limit.

Such fees may also be tiered or structured on a graduated scale where the lessee pays one lump charge that covers the first few hundred miles beyond the limit, then a cents-per-mile fee beyond that. Furthermore, the lessee is responsible for any excess wear and tear that occurs with the asset.

At the conclusion of a closed-end lease, the lessor might look to sell the asset at its depreciated value. It is possible that the lessee might still seek to purchase the asset at that this new rate, and there may even be incentives offered to complete such a deal at a reduced price compared with other potential buyers.

RELATED TERMS
  1. Bargain Purchase Option

    A bargain purchase option in a lease agreement allows the lessee ...
  2. Capitalized Lease Method

    A capitalized lease method is an accounting approach that posts ...
  3. Bargain Renewal Option

    Bargain renewal option is a clause in a lease agreement that ...
  4. Minimum Lease Payments

    The minimum lease payment is the lowest amount that a lessee ...
  5. Land Lease Option

    A land lease option is right but not obligation for a renter ...
  6. Capital Lease

    A capital lease is a lease that's considered to have the economic ...
Related Articles
  1. Personal Finance

    New Wheels: Lease or Buy?

    Buying or leasing a car both have advantages and drawbacks. Find out which is best for you.
  2. Personal Finance

    Is There a Way to Get Out of Your Car Lease Early?

    For those who no longer want their car for whatever reason, transferring the lease to an interested party can be a particularly appealing choice.
  3. Personal Finance

    Make the Right Choice: Buying or Leasing a Car

    Ask yourself these questions before deciding between leasing or buying a car.
  4. Personal Finance

    Should You Buy or Lease a New Car?

    Deciding whether to lease or purchase a car depends on a number of factors.
  5. Personal Finance

    Should You Borrow Money for a Car Purchase?

    Does it make sense to take out a loan, pay cash or lease a car?
  6. Managing Wealth

    Millennials Guide: How To Read a Lease

    Everything you need to know before you rent a home.
  7. Investing

    Closed-End vs. Open-End Funds

    Open-end products may be a safer choice than closed-end, but closed-end funds might produce a better return.
  8. Personal Finance

    Wait on Buying a Pickup (F, GMC)

    Used car prices are dropping everywhere. But if you're in the market for a pickup truck, a good bargain is less of a guarantee – thanks to strong demand.
  9. Investing

    Should You Buy Property on Leased Land?

    Find out what to consider before investing in a leased-land property.
  10. Personal Finance

    Wheels Of A Future Fortune

    Buy a quality car without driving your expenses through the roof.
RELATED FAQS
  1. What are some types of off-balance sheet assets?

    Learn about what types of assets are often accounted for using the off-balance sheet method and why this accounting technique ... Read Answer >>
  2. If a telecommunication company wants to build a tower on my land how much should ...

    Get help in understanding how much income it is possible to receive for leasing land to a telecommunications company for ... Read Answer >>
  3. What is "leverage" as it is used in closed-end funds?

    A distinguishing feature of closed-end funds is their ability to use borrowing as a method to leverage their assets. An ideal ... Read Answer >>
Trading Center