Closed-end leasing is a

contract A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tr ...

-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,Robertson, ''Crimes against humanity'', 90. with its precise definition a matter of longstanding debate. It has been vario ...

in the

U.S. The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territori ...

and

Canada Canada is a country in North America. Its ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, covering over , making it the world's second-largest country by tot ...

. It allows a

person A person ( : people) is a being that 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 such as kinship, ownership of prope ...

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, r ...

for a fixed term, and the right to buy that property for the agreed

residual value ''Residual value'' is one of the constituents of a leasing calculus or operation. It describes the future value of a good in terms of absolute value in monetary terms and it is sometimes abbreviated into a percentage of the initial price when the i ...

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. Industria ...

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 sale to business or institutional customers. A retailer purchases goods in large quantities from manufacturers, directly or through a wholesaler, and ...

motor vehicle 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 is a term that refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the ...

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 Rent may refer to: Economics *Renting, an agreement where a payment is made for the temporary use of a good, service or property *Economic rent, any payment in excess of the cost of production *Rent-seeking, attempting to increase one's share of e ...

"; 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 In computer science, amortized analysis is a method for analyzing a given algorithm's complexity, or how much of a resource, especially time or memory, it takes to execute. The motivation for amortized analysis is that looking at the worst-case ...

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 compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...

es or license fees which may be assessed on the lessor as owner of record. Motor vehicle leases generally include a provision for determining the amount of "excess

wear and tear Wear and tear is damage that naturally and inevitably occurs as a result of normal wear or aging. It is used in a legal context for such areas as warranty contracts from manufacturers, which usually stipulate that damage from ''wear and tear'' w ...

" (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 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 uses 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 (ex: the American tobacco companies have "deep pockets"), although it can be us ...

s" liability for injuries resulting from an

accident An accident is an unintended, normally unwanted event that was not directly caused by humans. The term ''accident'' implies that nobody should be blamed, but the event may have been caused by unrecognized or unaddressed risks. Most researche ...

. In those states which assess a

use tax A use tax is a type of tax levied in the United States by numerous state governments. It is essentially the same as a sales tax but is applied not where a product or service was sold but where a merchant bought a product or service and then conv ...

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 lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that ...

-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 process of exploring, creating, and delivering value to meet the needs of a target market in terms of goods and services; potentially including selection of a target audience; selection of certain attributes or themes to emph ...

. 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 A credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government), predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaultin ...

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