A financial arrangement
. Usually, it goes something like this:
- Bank buys car.
- You pay a monthly fee for using the car. This is almost like rent. The car continues to be owned by the bank.
- After a predetermined period of leasing, you have the option of just walking away from the deal, leaving the bank with the car, OR you can pay what is called the residual and YOU end up owning the car.
Here is a simple example with reasonable numbers: You want to buy a $16,000 car. You talk to a bank, and they say something like "Ok, it's $450 a month for 2 years with a 50% residual." This would mean you would pay $450 every month for two years, and after two years, you can either buy the car for $8,000 or walk away from the deal. In total, if you work it out, with the lease you would pay $18,800 for the car, instead of $16,000 if you chose to buy it; or you would lose $10,800.
Businesses love it, because the $450 every month counts as an expense, and is thus tax deductible. It can cut a lot of money off the price of a car.
The above is called a finance lease; the other type of lease is an operating lease, which is the same as the above, except that the bank pays for the maintenance, insurance, registration, etc. of the vehicle.