Both forms of these leases are essentially financial arrangements for vehicles, equipment or other business capital. However, there are some common characteristics and traits for these leases that make an impact on the risks that the Lessee or Lessor takes. An open end lease typically has at least the following characteristics:
1) A term of anywhere from twenty four to thirty-six months;
2) The Lessee typically assumes the risk of loss of, damage to, the leased vehicle. Typically, the Lessee is required to insure the vehicle and name the Lessor as the loss payee;
3) The Lessee assumes all responsibility for repair and maintenance of the leased vehicle;
4) The Lessee promises to make a fixed monthly payment during the life of the lease and to make a final lump sum or guaranteed residual payment at the end;
5) The lease payments plus the guaranteed residual payment return to the Lessor its original investments in the automobile (the purchase price), its cost of financing, all related overhead expenses, and a profit;
6) The Lessee does not have a specified option to purchase the vehicle at the conclusion of the lease period.
A closed end lease is similar, but with one very significant difference. The Lessee does not guarantee residual value of the vehicle or leased equipment at the end of the Lease. Instead, the Lessor assumes the risk of any loss in residual value.
Typically, banks will not directly enter into closed end leases, because it can run afoul of the National Bank Act. However, banks will often acquire closed end leases as part of a leasing portfolio from independent leasing companies.
If you have any questions or concerns about leasing a vehicle or business equipment and negotiating the appropriate type of lease, then do not hesitate to contact us.