There are two types of automotive leases available in the United States; an open-end lease and a closed-end lease. Read on to learn about each and their differences.
Closed End Leased vs. Open End Lease?
- Close-ended leasing uses fixed terms, mileage limits, and payments, with the leasing company assuming depreciation risk.
- At lease end, close-ended lessees may owe for excess mileage or damage but can purchase the vehicle without responsibility for its resale value.
- Open-ended leasing is commonly used for commercial vehicles and makes the lessee responsible for any gap between the estimated residual value and actual market value.
- Open-ended leases offer flexible terms, variable depreciation, and no mileage restrictions or early-termination fees, but may require an additional payment if the vehicle loses value.
What is Close Ended Leasing?
- Close-ended leasing is based on a pre-determined number of miles a customer will drive in a year.
- At the end of the leasing term, the customer is responsible for any excessive damage or additional mileage overages.
- Any loss of value, through depreciation of the vehicle, is the responsibility of the leasing companies, not the individual.
- The lessee has the option to purchase the vehicle, at the end of the term.
- The lessee has no responsibility in supporting the vehicle’s resale value.
- The fixed term of the lease is usually between 24 to 36 months.
- Interest rates are fixed with no variation in payments.
What is Open Ended Leasing?
- Open-ended leasing is typically used in commercial leasing.
- The lessee is responsible for paying any difference between the estimated lease-end value (residual), and the actual market value at the end of the lease agreement.
- The total lease costs are calculated at the end of the lease term, and the vehicle(s) under the lease are sold.
- If a loss is incurred at the end of a lease term, it is treated as an additional payment.
- The Federal Customer Leasing Act provides a measure of protection for open-ended leases by restricting the end-of-term liability to no more than the total three monthly payments.
- Open-ended leases include variable depreciation rates.
- Leases are customized in variable terms with no early termination fees or mileage restrictions.
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