So, you’re thinking about buying a car. You don’t have funds to pay for it upfront, which means you will have to apply for a car loan. But are there any other options?
A car lease could provide an alternative to a car loan, but just like a car loan, it comes with various pros and cons. In this post, we’ll look at the different types of car leases and how they work, to then compare car leases and car loans so you can make an informed decision regarding which option will work best for you.
Leasing a Car: The Basics
How does leasing a car work? When you apply for a car loan, you use the borrowed funds to buy the car you want, and then repay the loan amount plus fees and interest over an agreed period of time. Throughout that loan period, the car is yours, although the lender may have the right to repossess and sell the car if you fail to repay the loan.
With a car lease, things work slightly differently. When you lease a car, you are essentially ‘borrowing’ the car and paying for its use over a set period of time. The car is not yours, and there may be certain restrictions regarding how you can and can’t use the car.
Types of Car Lease
Novated Lease: With a novated lease, you enter into an agreement with your employer and a finance company, where your employer agrees to make the car lease payments to the finance company from your pre-tax salary. This type of lease can result in favourable tax implications. The car does not need to be used for work purposes, and can be purchased at the end of the term with a balloon payment, sold or traded in, or kept longer with a lease extension.
Finance Lease: A finance lease allows businesses access to vehicles throughout the lease term, while paying the lease payments direct to the finance company. At the end of the term, the business leasing the vehicle must either purchase it from the finance company or lease the vehicle again.
Operating Lease: An operating lease works in much the same way as a finance lease, except for the fact that the business leasing the vehicle is not responsible for the residual value of the vehicle at the end of the lease term, and can simply hand it back.
Car Lease vs. Car Loan
- With a car lease, you can expect lower payments than a car loan. This could make running a car more affordable, as you have more money available to cover running costs such as fuel.
- A car lease may also provide you access to much newer cars than you would be able to afford via a car loan. By switching to a new car every few years, you would also have access to the latest safety, design and technology features.
- Unlike a car purchase using a car loan, a leased car may come with a maintenance package, meaning maintenance costs are included in the lease payments.
- One of the main attractions of a leasing option such as the novated lease are the tax benefits. For more on this, talk to a registered tax agent.
- You do not own the car. As such, it can’t be counted as an asset.
- You can’t make any modifications to the car.
- There may be restrictions regarding how many kilometres you can drive before you start paying out extra costs.
- You need to keep the car in good condition if you plan to return it at the end of the lease.
- Continuing to lease cars over a long period can be costly, especially when you return and upgrade every few years. Unless you choose to pay a balloon payment to keep the car, you have no asset to show for years of regular payments.
- With a car loan, you own the car. With each repayment, you increase the equity in this asset, so that when the loan is repaid, you own it outright.
- You have the option to sell the car after you have repaid the loan.
- You can make any changes you like to the car, you can drive it as much as you want, and you can use it for any purpose.
- Opting for a car loan, you may have higher recurring repayments than with a car lease.
- While you can sell the car when you wish, you will have to deal with factors such as depreciation, and higher maintenance and running costs on older vehicles.
Before making a decision, be sure to compare all your options carefully. At Car Loan World, you can compare car loans and leasing options such as novated leases. If you have any questions about which option is right for you, contact our team or check out our FAQs.