Businesses looking to lease fleet vehicles should be aware of their options. Some may be unaware that there are two types of leases available: closed-end and open-end. Each type has benefits and differences that make them better suited to different needs.
In this blog, we will discuss the difference between an open and closed-end lease and how to decide which one is best suited to your business needs.
What Is A Closed-End Lease?
Closed-end leases may offer lower risk and predictable payments. They typically have fixed terms and mileage limits. As the lessee, you are responsible for keeping the vehicle's mileage below the contractual limit and minimizing wear and tear; there are additional costs if you go beyond these limits. But as long as you adhere to the lease agreement, there should be no additional costs upon returning the vehicle. This type of lease can work well for lower predictable mileages.
What Is An Open-End Lease?
Also known as a TRAC or commercial lease, an open-end lease is designed for business use, combining the flexibility of ownership with the cash flow and tax advantages of leasing. Open-end leases have no mileage limits and allow for more wear and tear than closed-end leases.
At the end of an open-end lease term, you are responsible for the market value and condition of the vehicle. While this means there could be additional costs, you can mitigate this risk by keeping up with routine maintenance and meeting the obligations of the lease. On the flip side, you’ll also receive any gains on the vehicle at the end of its term.
What Type of Lease Should You Choose?
Both open-end and closed-end leases help improve business cash flow when compared to purchasing. Both allow you to maintain your ability to secure loans for other parts of your business.
There are several things to consider when deciding which type of lease is best for your business:
Mileage
If you require your fleet vehicles to travel long distances or cannot accurately estimate mileage, you may want to consider an open-end lease to avoid being charged for overages.
Terrain
If your vehicles have to travel on rough or unpaved roads to reach job sites, open-end leases will suit you best since they allow for more wear and tear on the vehicles. If your vehicles drive on paved highways and city streets, they may be subject to lighter wear and tear, and a closed-end lease may be sufficient.
Risk
How much risk is your business comfortable with taking on? For businesses that are more risk-averse and want to avoid unexpected costs, a closed-end lease could be appropriate. As long as you meet the mileage and condition requirements of the lease, there will be no additional costs once the lease is over.
An open-ended lease offers less predictability, but you’ll have the opportunity to capitalize on any resale gains at the end of the lease term.
Flexibility
If you need to add or remove vehicles from your fleet throughout the year, an open-end lease allows you to contract vehicles as you need them. They typically convert to a month-to-month agreement after the initial 12-month term is complete, allowing you to remove vehicles from your fleet if your organization’s needs change.
How a Fleet Management Company Can Help
A fleet management company is a valuable partner to help you determine which type of lease is best for your business. They work with you to assess your needs so you can choose the lease that will best help you achieve your business goals.
They also assist in managing your leases and cycling the vehicles out at the end of the lease term.
At Ewald, we primarily provide open-end leases for our clients, because of the flexibility they provide for businesses. With no mileage limits, more lenient wear-and-tear policy, and the ability to realize gains at the end of the lease term, open-ended leases can be a tool to better manage your fleet’s total cost of ownership.
Final Thoughts
There are many factors to consider when choosing between a closed-end and open-end lease for your fleet vehicles. Choosing the right lease will help you operate a more efficient and profitable fleet, allowing your employees to get the job done in a way that’s cost-effective for your business.
