All About Car Leasing
If you’re thinking of getting a new car, leasing is an alternative option to buying or taking out a car loan. Whether car leasing is a good option for you depends on your individual situation.
This article will explain everything you need to know about leasing, including answers to FAQs. The information will help you to make the right decision about whether to lease or buy your new car.
How does leasing a car work?
Leasing a car involves renting the vehicle for a set period. Standard lease terms are two to five years. At the end of your term, you can usually choose to:
- renew (extend) it.
- buy the car at its residual (current market) value.
- trade the vehicle in and lease another.
- hand the car back to the dealer or finance provider who you have your agreement with and simply walk away.
Car leasing options in Australia
There are three main types of car leases in Australia.
We’ll now look at each of these options in turn.
Novated leases are for individual employees. They are part of three-way salary sacrificing arrangements between employers, employees and a finance company or dealer. They involve your employer deducting a monthly lease repayment from your pre-tax salary and paying it to the finance company or dealer.
The monthly payment usually includes a payment for using the vehicle, as well as an amount to cover fuel, maintenance, registration and insurance.
Taking out a novated lease has tax benefits if you’re an employee because it lowers your take home pay, but it usually comes with higher interest rates and monthly fees and, which can often cost more overall.
You can read about novated leases in more detail here.
Finance leases are for business purposes. In the last decade they are no longer popular compared to Chattel Mortgages which offer benefits of ownership including upfront expense claiming of the full asset purchase cost under Temporary Full Expensing (Instant Asset WriteOff).
These days Finance Leases are mainly used by larger companies seeking to outsource their vehicle fleet management. Under a Finance Lease the Finance company retains ownership of the asset leased by the lessor. Businesses usually have the option to purchase these vehicles at the end of the term via a balloon payment or to renew the lease.
Operating leases are similar to finance leases but they usually have a shorter term and no buying or renewal obligation. The car is simply handed back to the finance company or dealer at the end of the term, think of it as a long term car rental. Operating Leases offer a hassle-free way to use and asset without worrying about its disposal at the end of the lease term, but this convenience usually comes at a higher cost than other leases.
Is leasing a car worth it?
Whether or not leasing a car is worth it depends on your specific situation. There are pros and cons.
The pros and cons of leasing a car in Australia
Let’s look at the pros and cons in turn.
Benefits of leasing a car
The advantages of leasing a vehicle include:
- not having to pay the full price of the vehicle upfront therefore will probably be able to afford a better car.
- not needing to come up with a deposit for a car loan.
- the ability to easily upgrade your vehicle at the end of your lease term.
- your regular payments being cheaper than regular car loan repayments.
- not paying any GST on the vehicle’s purchase price.
- taking advantage of the buying power of leasing companies who buy vehicles in bulk for cheaper prices than you could get as an individual buyer.
- no obligation to buy the car at the end of the term. You can simply take out a lease on a new vehicle or walk away.
- not having to worry about budgeting for additional running and maintenance costs. They are normally factored into your regular payments.
- paying less tax if you take out a novated lease.
Drawbacks of leasing a vehicle
The disadvantages of leasing a car include:
- not owning the vehicle during the term. If you take out a car loan or chattel mortgage on the other hand, you are increasing your equity (ownership) with each loan repayment you make.
- Higher overall costs can occur due to higher underlying interest rates and monthly account fees.
- (For GST registered borrowers) not being able to expense the full cost of the car upfront under Temporary Full Expensing because you don’t own it.
- (For novated leases) the cost impact of changing employers during the term of your lease. See below.
- not being able to sell the vehicle (because you don’t own it). Even if you take out a loan to buy a vehicle, you can still sell it. At the end of a lease, other than the use of the vehicle, you have not accrued any ownership benefits.
- High End of Lease/ Renewal Costs due to the final payout figure to take ownership of the car being much higher than the actual market value of the car. Lessors may be surprised that, in spite of all their repayments, they’ve accrued no equity in a car, with the ‘take ownership’ option being prohibitively expensive they are once again forced to renew their lease and go through the same process again.
- not being allowed to make any modifications to the vehicle without permission like you would if you bought it.
- potential usage restrictions, such as a limit on the number of kilometres you can drive in a year without making additional payments. On the other hand, if you buy the vehicle or take out a loan for it, there are no such restrictions.
- potential early termination fees if you want to get out of the lease before your term expires.
- being more expensive than buying a vehicle outright upfront with cash. It can also work out more expensive than taking out a car loan or chattel mortgage, depending on the terms and conditions of the agreement.
How much to lease a car?
This depends on a range of factors, including:
- the underlying interest rate of the lease (not always disclosed)
- any insurance fees and commissions added by the leasing company (not always disclosed)
- Monthly account fees
- the value of the vehicle
- the term (shorter terms usually have lower monthly payments)
- the lease conditions (such as how many kilometres are included in the running costs of the agreement)
- whether a balloon payment is included at the end of the term.
Is leasing a car better than buying?
There is no right or wrong answer to this question. It depends on your specific situation and needs. For some buyers, leasing will be better than buying (and vice versa).
For businesses, sole traders, or employees who use their car for business use, you should also consider a chattel mortgage. For employees who use their vehicle privately, you should consider a simple car loan.
How to lease a car
The steps involved in leasing a car are outlined below.
Decide on the type of lease you want. If you’re an employee, it will be a novated one, but you’ll need to check with your employer that they offer salary sacrificing.
If you’re running a business, you can choose between finance and operating leases.
Find the vehicle you want. The fun part!
Talk to a broker who will be able to give you advice on different leasing providers. A broker will also be able to explain all the terms and conditions to you. You can then choose the agreement that best suits your needs.
Other car leasing FAQs
Can you use a leased car for private, non-business purposes?
Yes, you can use a novated lease purely for private purposes if you want, or for both private and business purposes. The only requirements are that you’re employed and your employer agrees to make your lease payments from your pre-tax salary.
If you’re taking out a finance or operating lease for a business vehicle, you should use it at least 50% of the time for business purposes so you can claim the payments as tax deductions.
What are the alternatives to leasing?
Alternatives to leasing include:
- paying cash for your vehicle upfront.
- taking out a personal car loan. You can find out more about that here.
- taking out a chattel mortgage. You can find out more about chattel mortgages here.
- taking out a business vehicle loan. You can read more about that here.
What is a fully maintained vehicle lease?
A fully maintained agreement includes all vehicle running costs (including fuel, registration, servicing and insurance) in the regular payment. The opposite of a fully maintained agreement is a self-managed lease, where you are responsible for these costs in return for lower regular payments.
Do I have to pay fringe benefits tax (FBT) on a novated lease?
Employees don’t pay FBT, employers do. You may get charged this cost by your Employer. However, if you have a novated lease, you will have a reportable fringe benefit amount on your annual payment summary from your employer. This amount isn’t taxed, but it will be considered as income if you apply for any government benefits.
Can you transfer a novated lease to another employer?
You can, if the new employer agrees. The problem is, those employers that offer novated leasing usually have a relationship with a single supplier (for ease of payroll processing and tax management, rather than managing payments through multiple providers), so the employer will typically only allow a lease through its existing supplier. If not, you can continue paying the novated lease payments yourself from your post-tax dollars or you can buy the vehicle outright if you can afford the payout figure.
How we can help
If you’re looking to lease a new car, talk to our experienced brokers at Auto Car Loans. We’ll take the time to understand your situation before finding you a great deal.
We arrange vehicle finance for a living from a panel of over 50 lenders, and we can save you money, time and hassle. We work for our clients, not for lenders.
Get in touch with one of our expert finance brokers today by calling 1300 301 051 during business hours.
DISCLAIMER : The thoughts and opinions conveyed on this website are those of the authors only and are of a general nature. This does not constitute financial or general advice to you from Auto Loans Group. You should seek your own independent advice from a professional which is specific to your circumstances before considering any of the items referred to in this article, including finance, insurance, and car buying.