What is a lease(definition)

A written agreement under which a property owner allows a tenant to use the property for a specified period of time and rent.

A contract that is typically entered into by a lessee (the individual who will be driving the given vehicle) and a lessor (the individual or company that actually owns the vehicle). The lessee is agreeing to pay for the use of the vehicle over the period of the lease.

Payment are determined by depreciation, which is the value that the vehicle is expected to lose over the term of the lease. The lessee also assumes financial responsibility for any damage done to the vehicle over the period of the lease. At lease end, the lessee must return the vehicle to the lessor, unless the lessee decides to purchase the vehicle at lease end.

Here's how it works:

Say you want to lease a $20,000 car for three years. At the end of the lease, the car will have depreciated (decreased in value) to $10,000. You've used up $10,000 of its value. Divide this $10,000 by 36 to get your monthly payments. Pretty simple, huh?

But wait a second. When you lease, you pay a significant amount of interest on the transaction. And there are tax and license fees. And all cars don't depreciate evenly. But still, the basic concept of leasing is that you pay for the depreciation of the car.

Is leasing right for you? This question is hard to answer. It really depends on your lifestyle and your preferences. We have summarized some of the key points in the section that follows.