Open-End Lease
Categories: Real Estate
At the end of most horror stories, you know there's a confrontation coming with the monster. Open-end leases are like that.
At the end of an open-end lease, the person leasing the asset is responsible for a balloon payment: a large, one-time fee. A monster at the end of the story.
Open-end leases are popular with cars. You sign a three-year, open-end lease. You pay $400 a month for the car during that time. At the end of the three years, you have to make a balloon payment equal to the difference between the residual value of the car and its fair market value.
So...say the original value of the car was $30,000. You've paid $14,400 ($400 times 36 months). However, you've ridden the car hard, putting on a lot of miles and spending most weekends drag racing on empty city streets. The car is assessed at $10,000, while the fair market value for that car should be something closer to $15,000. You would be on the hook for the $5,000 difference.
