Automotive

Open or Residual Value Lease

  • Last Updated:
  • Jul 21st, 2020 7:35 pm
[OP]
Newbie
Nov 17, 2018
20 posts
4 upvotes

Open or Residual Value Lease

I paid a deposit for a new car today, but due to COVID their new process is they send you home and do all documentation electronically rather than in the finance office.

The lease contract has wording around a Residual Value being GUARANTEED BY THE LESEE. A quick google search led me to the OMVIC website which details closed leases where you have the option to purchase or return the car at lease end and open leases where the consumer is responsible for the difference between the residual and the value of the car.

Why would a dealer send me a lease like that? It’s totally freaked me out and makes me want to back of the deal. Am I over reacting? Why would they not just write up a standard lease?

I asked the question over email but they are closed now.
19 replies
Deal Expert
Mar 23, 2004
33175 posts
14972 upvotes
I never understood why anyone would go for an open-ended lease. This is basically a balloon finance by another name but I believe it involves higher interest, though it all depends. Anyway what do you mean by "back out"? Did you sign anything yet and/or put down a deposit? If you haven't then by all means don't agree to it if it doesn't look good to you. If you have already signed/put down a deposit well...buying (or leasing) a car is not like buying a toaster at Best Buy, you can't just back out of it without hassle and the possibility of losing money (i.e. part or all of your deposit).
Deal Expert
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Jul 30, 2007
31871 posts
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Toronto
Typical leasing of new cars these days are conducted primarily on closed end (walk away) leases.

You can go back and rectify the type of leasing you want to do.
[OP]
Newbie
Nov 17, 2018
20 posts
4 upvotes
They took a deposit before I left the dealership. I haven’t signed anything as they only sent it electronically after I left. We had an agreement on monthly price, term and mileage. I questioned them when they asked for the deposit without anything to sign and they said it was the new process with COVID.

I probably shouldn’t have put down the deposit I guess.
[OP]
Newbie
Nov 17, 2018
20 posts
4 upvotes
booblehead wrote: Typical leasing of new cars these days are conducted primarily on closed end (walk away) leases.

You can go back and rectify the type of leasing you want to do.
Yea, I just have no idea why they would put a non standard lease in the contract...
Deal Addict
Jan 8, 2007
3140 posts
1708 upvotes
AB
GM, Ford and FCA have in house open leases sometimes. Open leases can work well for very high in demand trucks for example.

I personally like closed ended leases as I know for sure what the end value will be.
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Sep 9, 2012
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Oakville, ON
broken1 wrote: I paid a deposit for a new car today, but due to COVID their new process is they send you home and do all documentation electronically rather than in the finance office.

The lease contract has wording around a Residual Value being GUARANTEED BY THE LESEE. A quick google search led me to the OMVIC website which details closed leases where you have the option to purchase or return the car at lease end and open leases where the consumer is responsible for the difference between the residual and the value of the car.

Why would a dealer send me a lease like that? It’s totally freaked me out and makes me want to back of the deal. Am I over reacting? Why would they not just write up a standard lease?

I asked the question over email but they are closed now.
Deal Fanatic
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Sep 9, 2012
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broken1 wrote: I paid a deposit for a new car today, but due to COVID their new process is they send you home and do all documentation electronically rather than in the finance office.

The lease contract has wording around a Residual Value being GUARANTEED BY THE LESEE. A quick google search led me to the OMVIC website which details closed leases where you have the option to purchase or return the car at lease end and open leases where the consumer is responsible for the difference between the residual and the value of the car.

Why would a dealer send me a lease like that? It’s totally freaked me out and makes me want to back of the deal. Am I over reacting? Why would they not just write up a standard lease?

I asked the question over email but they are closed now.
In this transaction you being the borrower are the Lessor and the financing company is the Lessee. Similarly as when you get a mortgage for your house from the bank - you are the mortgagor as the one borrowing the money and the bank is the mortgagee as the one lending the money.

So back to your transaction, the finance company as the lessee is guaranteeing the value of the vehicle at the end of the lease. So, if the vehicle is worth less than the guaranteed value then you can walk away with no strings attached and no liability to them. And if the value of the vehicle is higher at the end of the lease then you have the right to purchase it at the originally guaranteed price. So you have no downside risk and enjoy the upside option.

So basically, this sounds like a typical/normal closed end lease that you were expecting. I think the only confusion here is between which party is the lessor (you) and which party is the lessee (them).
[OP]
Newbie
Nov 17, 2018
20 posts
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CanadianLurker wrote: In this transaction you being the borrower are the Lessor and the financing company is the Lessee. Similarly as when you get a mortgage for your house from the bank - you are the mortgagor as the one borrowing the money and the bank is the mortgagee as the one lending the money.

So back to your transaction, the finance company as the lessee is guaranteeing the value of the vehicle at the end of the lease. So, if the vehicle is worth less than the guaranteed value then you can walk away with no strings attached and no liability to them. And if the value of the vehicle is higher at the end of the lease then you have the right to purchase it at the originally guaranteed price. So you have no downside risk and enjoy the upside option.

So basically, this sounds like a typical/normal closed end lease that you were expecting. I think the only confusion here is between which party is the lessor (you) and which party is the lessee (them).

No, the contract says the Lessee guarantees the residual. I’ve included a picture of that section here. I expect to have the standard purchase option...
6FDD79AC-F0A4-4D93-A2DD-2B8F71616263.jpeg
Edit also:
Types of Leases – Closed or Open

Closed-End

The most popular lease type for new vehicles is an “option lease” also known as a “closed-end lease.” This type of lease allows consumers to return a vehicle at the end of the lease and either walk away or buy the vehicle for a pre-arranged amount. You are not required to make any additional payments unless there is damage, the kilometres driven are higher than agreed upon or there is excessive wear and tear. Most manufacturer leases are closed-ended.
Open-End

The alternative type of lease is called a “residual obligation lease” or “open-end lease.” Consumers lease the vehicle and make the scheduled payments similar to the closed-end lease; however, at the end of the lease, the consumer is responsible for covering any shortfall between the residual value and the actual price the lessor sells the vehicle for. This type of lease is not as common because of the risk to consumers needing to make additional payments at the end of the lease term.
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Sep 9, 2012
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broken1 wrote: No, the contract says the Lessee guarantees the residual. I’ve included a picture of that section here. I expect to have the standard purchase option...

6FDD79AC-F0A4-4D93-A2DD-2B8F71616263.jpeg

Edit also:
Types of Leases – Closed or Open

Closed-End

The most popular lease type for new vehicles is an “option lease” also known as a “closed-end lease.” This type of lease allows consumers to return a vehicle at the end of the lease and either walk away or buy the vehicle for a pre-arranged amount. You are not required to make any additional payments unless there is damage, the kilometres driven are higher than agreed upon or there is excessive wear and tear. Most manufacturer leases are closed-ended.
Open-End

The alternative type of lease is called a “residual obligation lease” or “open-end lease.” Consumers lease the vehicle and make the scheduled payments similar to the closed-end lease; however, at the end of the lease, the consumer is responsible for covering any shortfall between the residual value and the actual price the lessor sells the vehicle for. This type of lease is not as common because of the risk to consumers needing to make additional payments at the end of the lease term.
You are called the Lessor. The leasing company is called the Lessee.
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Apr 16, 2007
8132 posts
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Financial District B…
broken1 wrote: No, the contract says the Lessee guarantees the residual. I’ve included a picture of that section here. I expect to have the standard purchase option...

6FDD79AC-F0A4-4D93-A2DD-2B8F71616263.jpeg

Edit also:
Types of Leases – Closed or Open

Closed-End

The most popular lease type for new vehicles is an “option lease” also known as a “closed-end lease.” This type of lease allows consumers to return a vehicle at the end of the lease and either walk away or buy the vehicle for a pre-arranged amount. You are not required to make any additional payments unless there is damage, the kilometres driven are higher than agreed upon or there is excessive wear and tear. Most manufacturer leases are closed-ended.
Open-End

The alternative type of lease is called a “residual obligation lease” or “open-end lease.” Consumers lease the vehicle and make the scheduled payments similar to the closed-end lease; however, at the end of the lease, the consumer is responsible for covering any shortfall between the residual value and the actual price the lessor sells the vehicle for. This type of lease is not as common because of the risk to consumers needing to make additional payments at the end of the lease term.
Technically both lease structures, closed-end and open-end are walk away leases. While the main contractual language states the lessee guarantees the residual versus the lessor guarantees the residual, if you drive and operate the vehicle within the kilometer guidelines (which almost always ascertains the residual value will be the market value at lease end) you can return and walk away from an open ended lease, same principle for a closed end lease.

The benefits of open-ended leases is that there's no kilometer restrictions which make open ended lease structures ideal for business use. All our field rep vehicles are open ended leases.

A lease is a lease. You don't own the vehicle. The lessor does.
If you operate the vehicle within 24k kms per year or less, with no catastrophic market event or major manufacturer collapse, then the projected open-ended residual should be just fine.
Last edited by mikeymike1 on Jul 20th, 2020 10:58 pm, edited 1 time in total.
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[OP]
Newbie
Nov 17, 2018
20 posts
4 upvotes
mikeymike1 wrote: Technically both lease structures, closed-end and open-end are walk away leases. While the main contractual language states the lessee guarantees the residual versus the lessor guarantees the residual, if you drive and operate the vehicle within the kilometer guidelines (which almost always ascertains the residual value will be the market value at lease end) you can return and walk away from an open ended lease, same principle for a closed end lease.

The benefits of open-ended leases is that there's no kilometer restrictions which make open ended lease structures ideal for business use. All our field rep vehicles are open ended leases.

A lease is a lease. You don't own the vehicle. The lessor does.
If you operate the vehicle within 24k kms per year or less, with no catastrophic market event or major manufacturer collapse, then the projected open-ended residual should be just fine.
What if I have a massive car accident that isn’t a total loss but is enough to reduce the cars resale value or the economy totally collapses along with the used car market?

Seems like there is no reason for me to take the risk, and predatory of them to present this after taking my deposit.
Deal Fanatic
Apr 16, 2007
8132 posts
3470 upvotes
Financial District B…
broken1 wrote: I paid a deposit for a new car today, but due to COVID their new process is they send you home and do all documentation electronically rather than in the finance office.

The lease contract has wording around a Residual Value being GUARANTEED BY THE LESEE. A quick google search led me to the OMVIC website which details closed leases where you have the option to purchase or return the car at lease end and open leases where the consumer is responsible for the difference between the residual and the value of the car.

Why would a dealer send me a lease like that? It’s totally freaked me out and makes me want to back of the deal. Am I over reacting? Why would they not just write up a standard lease?

I asked the question over email but they are closed now.
It's highly unusual for an manufacturer to pencil open-ended leases for their new car leases. (unless you were sold on open-ended lease benefits like - unlimited kms etc)
ie: Toronto Honda was notorious for offering open-ended leases and touting the no km restriction as a marketing scheme
Is this a new car dealer that you bought your car from or a broker of some sort?
Are you buying from some wholesale fleet organization?
Also, if you were denied credit from the manufacturer then the dealer may try using a 3rd party lessor for approval and then that lease structure may be open ended.
Last edited by mikeymike1 on Jul 20th, 2020 11:20 pm, edited 1 time in total.
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Sep 9, 2012
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broken1 wrote: I don’t think so...

20BE74E3-D970-4690-9E72-27FA9165591C.jpeg
Sorry - got it backwards!
[OP]
Newbie
Nov 17, 2018
20 posts
4 upvotes
mikeymike1 wrote: It's highly unusual for an manufacturer to pencil open-ended leases for their new car leases. (unless you were sold on open-ended lease benefits like - unlimited kms etc)
ie: Toronto Honda was notorious for offering open-ended leases and touting the no km restriction as a marketing scheme
Is this a new car dealer that you bought your car from or a broker of some sort?
Are you buying from some wholesale fleet organization?
Also, if you were denied credit from the manufacturer then the dealer may try using a 3rd party lessor for approval and then that lease structure may be open ended.
No to all
Buying a Hyundai from a regular dealer which was meant to be a regular lease, discussed very little other than the trim level and pricing (also I’m doing a low km lease with 16k as we don’t do more than 15,000 a year)
Deal Addict
Jan 8, 2007
3140 posts
1708 upvotes
AB
Do not sign up for an open ended lease. What if used prices collapse, due to say a pandemic, in 3-4 years, it could happen you know...
Sign a closed one, and enjoy...
[OP]
Newbie
Nov 17, 2018
20 posts
4 upvotes
Seems like it was an error on the sales teams side. The business manager gave me a call tonight and had no idea what I was talking about, I tried to explain what the documentation I had been sent said and she said it would be a standard lease as I expect.
[OP]
Newbie
Nov 17, 2018
20 posts
4 upvotes
booblehead wrote: All good then
One can hope.
I still do not have anything in writing...but maybe they just work a little slower than expected.

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