When thinking about renting a car, many people ask themselves one question: should I rent, rent, or buy? Renting, buying and renting a car are very different processes. Leasing and buying a car are both methods of car financing – with leasing, you pay to drive the vehicle for a certain period of time (often two or three years), whereas buying gives you the right to actually own the vehicle.
Car rentals are beneficial for drivers who prefer a new vehicle, are unsure of their long-term vehicle needs, and/or don’t want to deal with the hassle of selling their car at a later date. Or, buying is perfect for drivers who are more concerned with costs and long-term needs. Renting a car is something different altogether. Unlike buying and leasing, the cost of which is largely determined by certain factors such as the market value of the vehicle and expected depreciation, the cost of leasing does not follow a fixed formula. As such, renting a car is generally not cost-effective, and is only recommended for short-term use (less than a year – ideally just a few days).
If you’ve decided to rent a new car, you may think you’re done asking yourself, but there’s one more thing to consider: Do I want a closed or open car rental deal? Open and closed leases are the two main types of car rental deals. Closed end leases are more financially profitable for the lessee, while open end leases protect the leasing company.
Before going any further, it’s important to remember one important concept in car rental: salvage value. In car rentals, the salvage value of the vehicle represents the predicted value at the end of the lease term. A $20,000 car with a 50% remaining percentage after 24 months, for example, would have a salvage value of $10,000. In this case, the tenant will agree to pay the difference – $10,000 – plus any appropriate fees.
To predict the residual value of a car, the car leasing company looks at the vehicle’s make and model history, in addition to considering the duration of the lease and the expected mileage. Therefore, residue is an estimate – not a definite thing – meaning that at the end of the lease term the vehicle may be worth more or less than anticipated.
Now, let’s discuss the difference between open and closed leases. A covered car rental agreement is also known as a “walk-away” lease, as it allows the tenant to simply walk away at the end of the lease term, regardless of the actual value of the car. The renter only has to pay for additional damage and/or mileage as stipulated in the contract. In an open end lease, however, the lessee must cover the difference between the final and estimated salvage value.
Let’s consider the $20,000 New York lease mentioned above. Even though the salvage value after 24 months is $10,000, it is possible that the car will be worth less, such as $9,000. In this case, the value of the vehicle would be reduced by $11,000, even though the original lease was only set at $10,000. In a closed lease, the Brooklyn car rental company absorbs these costs, but an open-end lease requires the tenant to pay an additional $1,000 in depreciation.
What if the car is worth more than expected at the end of the lease? In a covered car leasing agreement, the lessee can choose to purchase the vehicle at a residual price (as long as the contract includes an option to buy). So, if the car sells for $11,000, the tenant can buy the vehicle for $10,000, then sell it for $11,000 for a profit.