It used to be that commercial leases came as one fixed offering: fleets were given a monthly rate that was determined by the lease duration and expected mileage. This option (the closed-end lease) is still available, but now fleet managers have another leasing option that allows for more flexibility: the open-end lease.
Both have their benefits. The first step in deciding which is best for your fleet is to understand what each type entails.
What is an open-end lease?
Open-end leases give fleet managers greater control of their vehicles. There are no mileage restrictions, and after a minimum term—at least 12 months—the fleet manager can terminate the lease agreement whenever they want. Every month, rates are lowered incrementally to account for depreciation; these rates are set in advance.
At the end of the lease, the leasing company is still ultimately responsible for selling the vehicle; the difference is the fleet manager assumes the cost of depreciation. If the vehicle sells for more than what was calculated in the agreement, the fleet manager is reimbursed. If it sells for less, it is the leasing company that is reimbursed for the difference.
The philosophy behind this type of lease is that fleet managers know how vehicles will be used. They understand, for example, that high mileage means less value on the used-vehicle market, and higher risk of reimbursement. This exposure to risk could be a drawback for those who lack experience with the used-vehicle market.
When open-end makes sense
- Mileage is high and/or unpredictable
- Fleet size must respond to fluctuating work volume
- Wear and tear is expected
- Fleet managers have the remarketing expertise to properly manage the risk of the reseller market
What is a closed-end lease?
The closed-end lease acts like a traditional retail lease. Fleets use the vehicle for a fixed amount of time and mileage, at a predictable monthly rate. This is a great option for those who don’t want the risk (or the work) of reselling the vehicle at the end of its use to the fleet.
For closed-end leases, the leasing company sets the monthly rate based on their prediction of depreciation costs. If they’re wrong, they absorb the loss; if the resale price is higher than predicted, they reap that reward.
The downside of the closed-end lease? Usage provisions and penalties. If the vehicle exceeds the permitted mileage, if the contract must be terminated early, or if the damage falls outside of the parameters for wear and tear, the fleet manager has to pay additional fees. Depending on the fleet, the thought of these costs can be enough to eliminate closed-end leases from consideration.
When closed-end makes sense
- Mileage is predictable; set driving routes
- Fleet managers need certainty, or don’t have time to manage open-end variables
- Multi-national fleets need to unify lease accounting
- Fleets stay relatively damage free
- Turning over your fleet every three years is important
- Interest rates are rising, which opens fleet to risk during resale
Having trouble deciding? Ask your fleet leasing partner. Both lease types are valuable—one is not inherently better than the other—so get expert advice to help you choose what’s best for your business.