What’s the difference between a car lease and a hire purchase?
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This article is over two years old, last updated on December 23, 2021. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent car loans articles.
Owning a car brings a sense of freedom and flexibility, but it can be expensive. If you need a car for work, and you don’t have the cash to buy a car outright, two options you could consider are a car lease or a hire purchase.
What’s the difference between a car lease and a hire purchase?
Car Lease
A car lease is a long-term rental agreement with the vehicle owner – often a finance company that buys a vehicle on your behalf to lease to you. You can use the car in exchange for a fixed monthly payment. For the entire time that you lease the vehicle, legal rights over it remain with the lessor.
When you lease a car, you will generally need to pay an up-front cost of the car’s first-month rental along with registration fee, stamp duty, and any other expenses. The lease term is typically between three and five years, and at the end of the term, you need to return the car to the car lessor or renew the lease.
During the entire lease term, you are liable for the vehicle’s maintenance. The lessor may also impose a limit on the number of kilometres you can drive, such as 35,000 kilometres a year. If you exceed the given kilometres, you may have to pay extra when returning the vehicle.
A novated lease is an arrangement between an employee, their employer and a lender to access a work vehicle. The employee takes out a lease and the employer makes the repayments to the lender on the employee's behalf out of their pre-tax income, similar to a salary sacrifice. This can reduce the employee’s taxable income, which could affect their tax returns.
You may have the option for a fully maintained novated lease, which not only includes lease payments for the car, but also covers running costs such as servicing, registration, insurance and even fuel.
A novated lease may offer the option to purchase the car at the end of the lease, provided you can make the final residual value or balloon payment, which may be expensive. Alternatively, you may be able to refinance this residual value and start a new lease.
Hire purchase
If you want to eventually own your work vehicle, but don’t have the cash to buy upfront, you may want to consider a hire purchase.
A hire purchase is an agreement between your business and a lender, where the lender buys a vehicle at your request for your business to use in return for regular payments. When the final payment is made, your business becomes the vehicle's owner.
Because the vehicle is being used for work purposes, this may allow your business to claim various tax deductions, such as the lease payments and depreciation.
Car lease vs hire purchase
If you’re not sure whether you should lease or hire purchase your next work vehicle, you may want to consider the differences between these methods and the benefits they could bring you and your business.
If you only need access to a vehicle for a limited time, and may want to upgrade in the future, a car lease could offer the flexibility you’re looking for. But if you’re looking at acquiring a vehicle for your business to own in the future, a hire purchase could be worth considering.
There are also other car finance options to suit the different needs of individuals and businesses, such as novated leases, chattel mortgages, and of course car loans.
You may need to calculate the potential cost of different car finance options to help you work out which ones may offer you and your business the greatest value. You could also consider opting for a balloon payment to help reduce some of your costs until the end of your car finance arrangement.
Once you’ve found a car finance option that is right for you, whether that’s a car lease, a hire purchase, or another option, you can contact the lender directly and provide some information about yourself and your finances to make an application. You could also consider contacting a car loan broker for more help selecting and applying for car finance.
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