Commercial Leasing: Open End (TRAC) Versus Close End Lease, Which Is Better For My Business
When acquiring a new truck or other vehicle for your business, there are three options available. Each has a different set of rules and parameters, and as a result each works better for different fleet situations. First is the traditional outright purchase, paid either with cash or financed. Then there are two different types of commercial leases: opened-end TRAC leases and closed-end leases.
Very simply, in an open-end lease you assume the depreciation risk but have more flexible terms. In a closed-end lease, the leasing company assumes the depreciation risk but the terms are more restrictive.
Open End (TRAC) Lease
An Open-End TRAC (Terminal Rental Adjustment Clause) Lease is also known as a finance lease, which as the name implies, permits you to determine the vehicle's service life after a short minimum term, usually 12 months.
After this period, the lease may be terminated at any time without penalty. Different factors can be used for different vehicles based on specifications and usage. In this type of lease you assume the depreciation risk. The original purchase price is reduced monthly by a predetermined amount for as long as the vehicle remains in service. You can usually select the depreciation factor, used to amortize the capitalized cost, though with some limitations.
When the vehicle is returned to the dealer, the sales proceeds are applied to the book value with any resulting gains passed back to you. If the selling price is less than the book value, you must pay the difference, although provisions for a percentage sharing of gains or losses between lessee and lessor may sometimes be available.
Closed End Lease
In a Closed-End Lease there is a fixed rate and term, usually 12 to 48 months. The lease agreement will only show the monthly rental amount, and not the rate factors involved over the lease period. Rate factors are calculated using the average outstanding balance over the full lease term, as opposed to the method used in TRAC leasing.
In addition to returning the vehicle to the dealership at the conclusion of the lease, you also have the option to purchase or sell the leased vehicle at lease-end for market value. This is advantageous when the market value of the vehicle is higher than lease-end value set by the leasing company. For example if you leased a truck through a Closed End Lease and the lease-end value is $18,000 but the market value is $22,000, you can attempt to sell the vehicle prior to the end of the lease term.
One traditional limitation of a closed-end lease is the preset mileage restrictions over lease term, usually 12,000 to 15,000 miles annually. The lessee is responsible for excess mileage charges that can vary from $.10-$.15 per mile or on a graduated scale, i.e., $.05 for first 200 miles, $.15 for all additional mileage. In addition, you are responsible for excessive wear and tear.
Some Assistance in Making Your Decision
Those terms and conditions are a lot to digest, but you can narrow your decision by filtering your own fleet profile through three "big picture" parameters. To do so it’s important to understand your fleet usage and driving patterns. Do you want direct and ongoing involvement in fleet management? You need to ask yourself how comfortable you are with risk. Further, do you have your arms around your company’s budgeting and cash flow. By evaluating your responses to those questions will assist you in determining which of the three potential financing solution best fits your needs.
South Bay Ford Commercial Headquarters can assist you with all your commercial leasing needs. As one of the largest providers of commercial vehicles in the South Bay, the experts at South Bay Ford will make certain that not only you’ll get the right vehicle for the job but that you’ll get the lease that best suits your business.