When you buy a vehicle, oftentimes you have no idea how long you are going to keep it. You hope it will last for a long time, but your needs may change and your maintenance costs may dictate a shorter, rather than longer, holding period. Further, it is quite difficult to predict its value when you do decide to sell it. Especially since you have no idea when, or under what circumstances, you may be selling it.
There is an element of risk when anyone attempts to predict the future value of a vehicle. Changes in the marketplace, the condition of the vehicle, the need for a quick liquidation all come into play. These factors are of no less concern to a leasing company.
There are essentially two (2) types of leases: closed and open. It is vital to understand the difference between the two, since the ramifications are quite different. It all boils down to one simple concept: who shall bear the risk of the vehicle's value at the end of the lease? With a closed–end lease, it is the leasing company. With an open–end lease, it is the consumer.
Many consumers prefer a lease to a purchase because they do not have to endure the financial uncertainty and inconvenience of getting rid of their vehicles.
When it comes to estimating the future value of a vehicle there is no certainty. However, the closest thing to a guaranteed value is a closed end lease with a purchase option. There is such a creature, but not every leasing company is willing to offer this. Most lenders believe that since they must assume the risk of loss on the sale of a vehicle leased under a closed end arrangement, if the vehicle's value at the end of the term exceeds the residual, they are entitled to make the profit.
Open–end leases are generally commercial and not a good idea for consumers. If you really want to have the option to buy your vehicle at the end of a lease, find a leasing company that offers a closed–end lease with an option to buy.
Nevertheless, if you really want to own your vehicle at the cheapest price, the lease might not be a good option for you. Because you pay either a small down payment or none at all and monthly lease payments are generally lower, you build little equity during the lease term. Therefore, if you choose to purchase the vehicle at the end of the lease, oftentimes you will find yourself paying at least twenty–five percent (25%) more than if you simply financed the car under a traditional purchase agreement.
