Closed-end leasing is a

contract A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...

-based system governed by

law Law is a set of rules that are created and are enforceable by social or governmental institutions to regulate behavior, with its precise definition a matter of longstanding debate. It has been variously described as a science and as the ar ...

in the

U.S. The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 states and a federal capital district, Washington, D.C. The 48 contiguous ...

and

Canada Canada is a country in North America. Its Provinces and territories of Canada, ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, making it the world's List of coun ...

. It allows a

person A person (: people or persons, depending on context) is a being who has certain capacities or attributes such as reason, morality, consciousness or self-consciousness, and being a part of a culturally established form of social relations suc ...

the use of

property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of property may have the right to consume, alter, share, re ...

for a fixed term, and the right to buy that property for the agreed residual value when the term expires. Closed-end leases are so called because they run for a fixed term, and the lessor and

lessee A lease is a contractual arrangement calling for the user (referred to as the ''lessee'') to pay the owner (referred to as the ''lessor'') for the use of an asset. Property, buildings and vehicles are common assets that are leased. Industrial ...

agree in the lease contract what the residual value of the property being leased will be. In most cases (particularly in

retail Retail is the sale of goods and services to consumers, in contrast to wholesaling, which is the sale to business or institutional customers. A retailer purchases goods in large quantities from manufacturers, directly or through a wholes ...

motor vehicle A motor vehicle, also known as a motorized vehicle, automotive vehicle, automobile, or road vehicle, is a self-propelled land vehicle, commonly wheeled, that does not operate on railway track, rails (such as trains or trams), does not fly (such ...

leases), the lessee has an option to purchase the property for the agreed residual value at the end of the lease term. Closed-end leases are not used for property which increases in value. In most cases, when a closed-end lease is entered, the lessor does not already own the property being leased. Rather, the lessor agrees to purchase the property for a certain amount (the "capitalized cost") from a third party, such as a car dealer. The lessee will often be required to offer money up front as an offset against the capitalized cost (this is called the "capitalized cost reduction" although it is sometimes erroneously referred to as a "down payment"). The difference between the (adjusted) capitalized cost and the residual value is the

depreciation In accountancy, depreciation refers to two aspects of the same concept: first, an actual reduction in the fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wears, and second, the allocation i ...

component of the lease cost. In addition to depreciation, the lessee must also pay the lessor's cost of financing the purchase of the vehicle, which is referred to as " rent"; the rent also includes the lessor's profit. The total lease cost can either be paid in a single

lump sum A lump sum is a single payment of money, as opposed to a series of payments made over time (such as an annuity). The United States Department of Housing and Urban Development distinguishes between " price analysis" and " cost analysis" by whether ...

, or amortized over the term of the lease with periodic (usually monthly) payments. Closed-end leases generally provide that the lessee is responsible for insuring the property, for maintaining it in accordance with the lessor's requirements, and for paying any

tax A tax is a mandatory financial charge or levy imposed on an individual or legal entity by a governmental organization to support government spending and public expenditures collectively or to regulate and reduce negative externalities. Tax co ...

es or license fees which may be assessed on the lessor as owner of record. Open-ended(conventional) motor vehicle leases generally include a provision for determining the amount of "excess wear and tear" (or "wear and use") at the end of the lease term, for which the lessee is responsible upon returning the vehicle. Closed-end leases have become very popular for automobile buyers in

North America North America is a continent in the Northern Hemisphere, Northern and Western Hemisphere, Western hemispheres. North America is bordered to the north by the Arctic Ocean, to the east by the Atlantic Ocean, to the southeast by South Ameri ...

since the mid-1980s. Shield laws in most states allow lessors to avoid legal responsibility for the actions of their lessees, which has made it practical for automakers to offer leases direct to

consumer A consumer is a person or a group who intends to order, or use purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. ...

s without fear of "

deep pocket Deep pocket is an American slang term; it usually means "extensive financial wealth or resources". It is typically used in reference to big companies or organizations (e.g. the American tobacco companies have "deep pockets"), although it can be ...

s" liability for injuries resulting from an

accident An accident is an unintended, normally unwanted event that was not deliberately caused by humans. The term ''accident'' implies that the event may have been caused by Risk assessment, unrecognized or unaddressed risks. Many researchers, insurers ...

. In those states which assess a use tax on vehicles, lessees need only pay tax on the amount of their lease payment, not on the entire value of their vehicle at the time of purchase. Finally, and most significantly, because lessees pay only for

and

financing Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm use ...

, and not the entire retail cost of the vehicle, payments can be significantly lower than in

loan In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing the deb ...

-based financing. This allows consumers to significantly shorten their purchase cycle, increasing new-vehicle sales, which gives the automakers reason to emphasize leasing programs in their

marketing Marketing is the act of acquiring, satisfying and retaining customers. It is one of the primary components of Business administration, business management and commerce. Marketing is usually conducted by the seller, typically a retailer or ma ...

. Closed-end leases are not always the best choice for consumers. The finance companies which offer consumer car leases frequently require lessees to hold more costly

insurance policies In insurance, the insurance policy is a contract (generally a standard form contract) between the insurer and the policyholder, which determines the claims which the insurer is legally required to pay. In exchange for an initial payment, known as ...

than would otherwise be necessary. Automakers often view leasing as a sales tool, and artificially inflate the lease-end residual value; this can make exercising the purchase option at the end of a lease more expensive than simply financing the vehicle over the longer term in the first instance. Finally, because of the increased financial risks undertaken by the lessor, higher

credit quality Credit (from Latin verb ''credit'', meaning "one believes") is the Trust (social sciences), trust which allows one Party (law), party to provide money or resources to another party wherein the second party does not reimburse the first party imm ...

is generally required to enter into a lease than to purchase a vehicle.

References

{{DEFAULTSORT:Closed-End Leasing Law of the United States Leasing Sales

See also

References