Lease vs. Buy A Car
Lease versus buy a car: Get all the facts and options, plus learn how easy it is to compare products via Savvy
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Leasing vs buying a car - which is best option for you?
What is a car lease?
A car lease can work a bit like vehicle hire. A lender buys the car, and you pay a fixed monthly fee to use it. Finance leases carry an obligation to purchase the vehicle at the end of the term, so there’s a residual amount due when the lease ends. Other options, called operating leases, give you a bit more freedom, so you can either make an offer for the vehicle or walk away. In order to use a finance or operating car lease, you need to use the car for business purposes at least half the time, but you’re free to buy a ute, car, or a van with a lease, as well as heavier commercial vehicles. With leases, you never own a vehicle until the finance term ends.
How does a car loan work?
You can use the equivalent of a car loan whether you’re a commercial or private buyer. If you’re the latter, secured car loans are a simple and convenient way to borrow. Because your car acts as collateral, your fixed monthly repayments have a low interest rate attached. If you’re in business, chattel mortgages work much the same way as a secured car loan. You make a fixed monthly payment with a competitive interest rate, and chattel mortgages have tax benefits designed for business. Both options let you use a deposit, trade-in, or borrow 100% of what your vehicle costs – and you own the car from the start of the term.
Pros and cons of lease vs car loan
| Leases | Loans | |
|---|---|---|
|
Ownership and Equity |
You never own the car with a vehicle lease until the finance term ends, and your payments don’t build equity in the car or commercial vehicle with an operating lease. With a finance lease, they do |
With a chattel mortgage or secured car loan, you build equity in the vehicle every time you make a repayment, and you own the car from the start – albeit with the lender holding a mortgage or claim |
|
Depreciation |
With an operating lease, you have no resale value risk, but with a finance lease, you do – although the residual is calculated from the depreciation rate, so the resale value shouldn’t be too far off your equity level |
You own the vehicle from the start of the term and continue to own it when the agreement ends, so you carry the resale value risk – but you do get to claim depreciation on your tax returns throughout the term |
|
Monthly Payments |
Operating lease payments are usually lower during the term because you’re mainly just paying for the vehicle’s depreciation. Finance leases work more like a chattel mortgage because a residual is due when the term ends |
Loan payments during the term cover the entire cost of the car, although you can use a residual to make them lower – but remember, you’ll either need to pay that or refinance when the term ends |
|
Damage and Wear |
You’ll be financially liable for damage that occurs during the car lease |
You won’t get penalised by the lender if the car gets scratched or damaged |
|
Modifications |
You won’t be able to modify the vehicle during the term |
You’ll own the vehicle, so you can customise or modify it during the loan |
|
Loan Terms |
Lease terms usually run between two and five years |
Secured loans and chattel mortgages run between one and five years, and you can refinance residuals to extend that period |
|
Tax Implications |
With finance and operating leases, the entire repayment – principal plus interest – is tax-deductible. The total cost of the lease is based on the ex-GST value of the car, because the lender claims the GST back |
With a secured car loan, repayments for any portion of business use are tax-deductible. With a chattel mortgage, you claim depreciation and interest on repayments as you go, and all the purchase price GST back as soon as you next file a BAS |
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Primary benefits of each car finance option
Operating Lease
Operating leases offer the most flexible end-of-term options of all the leases out there. That’s because when the agreement ends, you can choose to buy the car or just return it to the lender for no charge. Not only that, but you can also ask the lender to bundle associated running costs like rego, insurance, maintenance, and even fuel into your monthly repayment – meaning fewer headaches and easier budgeting for sole traders, and outsourcing of fleet management for larger companies.
Finance Lease
Finance leases offer the most flexible end-of-term options of all the leases out there. That’s because when the agreement ends, you can choose to buy the car, keep it for longer, refinance the residual – effectively extending the lease, or trade the vehicle in for a new one.
Novated Lease
The stand-out benefits with a novated lease are two-fold. Firstly, you get to buy your car with your pre-tax earnings, which lowers your income tax bill every year you’re repaying the finance. Not only that, but the better the car you buy, the less tax you pay. The second benefit is the lender claims back all the GST on the vehicle, so a novated lease is the only way a private buyer can avoid sales tax when buying a car in Australia. Between the two things, you can save thousands and thousands of dollars over the course of an agreement.
Secured Car Loan
The main benefits of a secured car loan are freedom, flexibility, and low interest-rate finance. That’s because you can do what you want in terms of modifications and buy a vehicle from a private or commercial seller. Terms can last anything between one and five years, and interest rates are a lot lower than with unsecured loans because the car acts as security and lessens the lender’s risk.
Chattel Mortgage
A chattel mortgage works much like a secured car loan, but it’s a commercial finance product. The most notable benefits of this type of finance are connected with tax and GST. You claim depreciation as per ATO guidelines, but you also get to claim all the GST back as soon as you file a BAS. There’s then no GST on repayments or any residual.
