Closed End leases, sometimes called “walk-away” leases:
Closed End leases are designed for people who like new cars every 3-4 years with factory warranties. This type of lease is the most common type of consumer lease today. This type of lease allows you to simply return your vehicle at lease end and have no other responsibilities. Closed End leases are based on the concept that the number of miles you drive annually is fairly predictable (12,000 miles per year is typical), that the vehicle will not be driven in rough or abusive conditions, and that its value at the end of the lease (the residual) is therefore somewhat predictable.
TRAC Lease, or Terminal Rental Adjustment Clause: (Open End)
This lease is designed for consumers who would like more of an “ownership role” when the lease comes to an end. A TRAC lease for business use allows the company to have a true operating lease for tax purposes, which allows the Lessee to expense the entire lease payment. On the consumer TRAC lease, tax incentives do not play a role because the lease is designed for personal use.
How it works..
The residual value is agreed upon by both parties at lease inception and will reflect a percentage value based off the length of term and anticipated mileage usage. However, you have the final say as to where you would like the residual set as long as it’s in a realistic realm of the vehicles actual end of term value. At the end of the lease you have more options, sell it yourself to make a profit, re-lease the vehicle for another term, or return it to FFL to dispose of. If the final sale price is greater than the residual value, the equity will be returned to you. On the flip side, if the vehicle was driven more miles than anticipated, any discrepancy between the agreed upon residual value and the vehicles actual end of term value will be the lessee’s responsibility.
