If you are in the market for a new car, you basically have a few options - Standard Finance, Novated Leasing, or paying cash. Deciding between car lease, finance, or forking out your savings in cash might be tougher than you thought. In most cases, it is not just a simple matter of finances; there is a lot more at play, including convenience, obligations, luxury, and car ownership responsibilities.
According to Statista and Research and Markets, more and more Australian motorists are warming up to the idea of car leasing. The fleet and private car lease industries are growing incrementally year after year. But even so, a deal where you drive away in any car without a purchase commitment and trade it in for a new vehicle after only two or three years might seem too good to be true.
There must be a catch - what are the pros and cons of leasing a car vs buying? More importantly, what is leasing a car? Well, there is no catch. Here are the basics of car leasing in plain black and white.
How does leasing a car work?
You are probably already familiar with how to go about buying a car using loans or other financing methods. But leasing is a lot different from buying. You basically ‘rent’ a car for a certain length of time, usually 2 to 4 years. Once the lease period ends, you can renew or extend the lease, purchase the vehicle at its residual value, or trade it in for a newer model.
The car dealer or car finance provider only asks for a monthly lease payment, which - depending on the lease agreement - can be paid by your employer, your business, or from your pocket.
Keep in mind that you have to be eligible for car leasing. Some of the qualification factors include your credit score, income, and employment history.
Car Leasing in Australia
Before leasing a vehicle, it helps to know all the options available to you. There are three general types of car leases in Australia, and each suits particular kinds of car buyers.
1. Novated Lease
A novated lease is a popular leasing arrangement among salaried employees. It is a three-way contract between an employee, employer, and a car dealer. The dealer provides the car, and the employer agrees to contribute a consistent monthly payment from the employee’s taxable income to cover the lease payments. The contributions also cover operational costs such as maintenance, fuel, and insurance.
A novated lease is quite economically sound because it lowers your taxable income and redirects funds that would otherwise be taxed toward financing the same car. Use our Novated Lease Calculator to find out how much you could save on a lease.
2. Finance Lease
A finance lease is a lease where a finance company usually owns the new car throughout the leased car term. However, the lessee has operational control over the new car. Finance leases are mostly used by businesses. A finance provider purchases the vehicle and leases it to an organisation in fixed monthly repayments or instalments.
At the end of the lease term, the lessee is obligated to pay the residual value of the car to the finance company and assume its ownership or renew the lease for another run. The residual value paid at the end of finance leases is known as a balloon payment.
3. Operating Lease
An operating lease is similar to a finance lease, except in this case, the lessee does not have to make a balloon payment after the lease period expires. The vehicle is simply handed back to the financier at the end of the lease term. Operating leases often will still allow you to purchase the car outright at the end of the lease or arrange a new lease.
Pros and Cons of Car Leases
Leasing is quickly becoming an alluring alternative to buying a new car, especially for the working class that can take advantage of novated leases. Many motorists seem to prefer subtle monthly lease payments rather than committing to car loans or making a massive investment in car ownership. However, there are two sides to leasing cars:
The Pros of a Car Lease
You are not paying GST on running costs, and the purchase of the new car.
You’ll likely get a large discount on the purchase price due to the buying power of the leasing company.
No waiting to save for a deposit is required on a car lease
There is no obligation or commitment to buy the car after the lease period ends.
Enjoy stress-free car maintenance and running costs from your pre-tax salary on a novated lease that can save you a heap of running costs.
You can save money on taxes via novated leases with great tax reductions.
You also get to drive high-value cars that you would otherwise not afford.
There is no bill shock when your registration renewal comes through, as each cost is budgeted for across the year.
The Government incentives make novated leases very attractive, especially for electric vehicles.
See what you could save on your next EV!
The Cons of a Car Lease
You do not own the car and therefore cannot use it as an asset, for instance, to secure a loan.
In the long run, a monthly payment might be more expensive than a new car purchase price if you opt to lease instead of a novated lease arrangement
Your lease will be locked in for a fixed period and terminating a lease contract prematurely may not be a great option financially if the car's value is lower than the payout value.
Pros and Cons of Buying a Car/Getting a Car Loan
Buying a car presents several benefits and privileges as well. But there are also some conveniences and financial shortcomings tied to purchasing and running your own vehicle.
The Pros
Once all the payments are made, the vehicle is yours.
You can modify and sell the car whenever you like.
There are no driving restrictions (the same applies to novated leases).
You don’t have monthly fees like lease repayments if you don’t get a car loan.
The Cons
You have to deal with high monthly payments for a car loan and a substantial upfront investment in buying a vehicle outright.
You are responsible for the vehicle’s upkeep, car insurance, running and maintenance costs.
You have to bear the vehicle’s depreciation and hustle for good resale value rather than have any trade-in options.
Your purchasing power may limit your vehicle options.
Bill Shock - registration renewal/major service/annual insurance bills pop up at unexpected times and are all paid after tax
If you get a car loan, you could be subject to a high-interest rate
Car loan is paid for from your after tax salary so there are no tax benefits.
Leasing vs Buying a Car: Which Is Right for You?
For some motorists, the decision to lease is purely based on affordability, while for others, it is a matter of priority or convenience. Most of those who opt to buy do it to enjoy the privilege of owning a used or new car or an emotional bond with the vehicle.
For the most part, it comes down to you to justify why leasing a car is smart or why leasing a car is a bad idea. Car buying ultimately comes down to your personal circumstances and whether you need to lease a car or buy one as a requirement for business purposes.
That said, it is important to weigh your options carefully and make all the necessary considerations when deciding to either buy or lease. Examine your lifestyle, job situation, and financial status to determine the right way to go. Sometimes you have to make sacrifices in some places, such as reducing your spending on branded gym wear or dining out less often.
If your commute is only necessitated by temporary jobs or contracts, then it probably makes more sense to lease cars rather than buy them as required. On the other hand, versatile and long-term transportation needs might require a more permanent solution. Plus, there is no problem with buying one car and leasing another if the merits of both arrangements complement each other.
If you go for a lease or car loan, it is best first to understand what you are getting into. Read the fine print thoroughly before signing on the dotted line. Make sure you understand and agree with all the lease terms and conditions, including details about insurance, pricing, tax benefits, warranties, penalties, and other particulars. The same is true for car loans, ensure you read the fine print and understand what your interest rate means you’ll pay over the longer term.
Paying cash for a car seems like a great option, but most people don't consider the fact that once they’ve paid for the car using savings, the money is locked up in a depreciating asset. This means your cash will reduce in value each year with the car value.
Get a Quality Novated Lease from the Team at Easi
We are of the firm belief that novated leasing is a better alternative than a standard car loan. If you’re looking for a change from having to constantly compare car loans to find the best price, our team can certainly help.
Easi is a finance company with over 20 years of experience in the industry of car leasing - meaning we can use our knowledge to deliver effective business car solutions every time. Our wide range of vehicle lease options come under flexible contract terms ranging from utes and large SUVs to hatchbacks and more.
To find out more about how Easi can assist with your novated leasing - or to discuss business car leasing options, contact one of our staff today.
Try our free novated lease calculator to see what you could save!
