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Commercial vs Consumer Leases: What You Probably Don’t Know

Of all the commercial vehicles in the United States, about 51% of them are leased. However, when I walk into a company that falls into the other 49% category, it is usually because of misinformation that they do not lease.

It's not anyone’s fault that the company was given the wrong information, it is that retail car salesmen rarely understand commercial leases.

When we talk about leases in a commercial application we are generally referring to open-end leases. Open-end leases mirror ownership in that there are no mileage caps and the company shares in the gain or loss from the sale of the vehicle. However, instead of being a capital expenditure, the vehicle becomes a monthly expense with a planned cycling point. Also, planning allows time to order vehicles instead of buying them off the lot so they are tailored to fit your exact demands.

What happens in an open-end lease is that an anticipated market value at the time of cycling is determined. This value is based on expected use and wear and tear of the vehicle. The monthly payment is then determined to amortize the cost of the vehicle over the length of the lease. From there the company uses the vehicle however they see fit. Once the vehicle is cycled with a new vehicle, the old vehicle is marketed for the highest possible amount. Assuming market predictions were correct, there is no additional expense. However, should the vehicle sell for less then expected, that difference will have to be made up but at the same time, if the vehicle sells for more than expected, the business profits.

What is also nice about open-end leases is that they do not lock a business into stringent constraints. If the case is made to replace the vehicle before the original lease term, it can easily be replaced with a new vehicle. This saves the company money by maximizing the market value and minimizing maintenance costs.

Hopefully this helps illustrate the differences between a commercial lease and consumer leases. Generally, open-end leases are the best way to accommodate commercial fleet applications. Should you have any other leasing questions, please feel free to email me at: dewald@ewaldauto.com

 

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