With cars being an essential part of many employees' working lives and a crucial part of any business operation, leasing is a popular way of funding the necessary vehicles. Leasing is different to taking out a personal loan, where you borrow a lump sum and pay it back with interest and any other fees or charges stipulated. Effectively, a lease is just like renting a car, but lasts for longer than the usual holiday type rental, usually between two and five years. Unlike most personal loans – though there are exceptions – there will be a residual payment at the end of the lease period. If there is a lump sum to pay, you can pay it off, or refinance to get some more time to repay.
How does a car lease work?
There are two ways of getting a car lease: a novated lease or a standard car lease. They work in similar ways in that you will be renting a car rather than owning it like when you take out a personal loan – although if you fail to make loan repayments the car is likely to be repossessed. With a lease, you make regular payments over an agreed period of time based on the purchase price of the car, with interest added along with any fees or charges. When the agreed time period is up, you can choose to trade the car in, pay the residual amount remaining and own it outright, or refinance for another loan or lease.
Why do people use a car lease?
A car lease can be a cheaper way to finance a new car, both for individuals and for businesses. You know what the repayments will be each month, as these will have been agreed with the lender. Depending on your circumstances, you may be able to own the car outright at the end of the lease period, or enter into another arrangement with the finance company.
What are the main features?
A novated lease can help you to effectively reduce your taxable income with the Australian tax authorities. In tandem with your employer and a supplier, you choose your car and organise a lease. With this type of lease, your employer takes on the responsibility for making your lease payments by deducting them from your salary prior to you being paid, thus reducing your taxable income.
An ordinary car lease works in a similar way to a novated lease, except the agreement is between you and the lender and there is not a tax-deductible advantage in the same way.
What are the pros and cons of car lease?
Repayments for a leased car may be cheaper than if you took out a personal loan, and so are useful if you have difficulty making large monthly repayments. You need to plan for what happens at the end of the lease in terms of paying a residual amount to own the car, taking out another lease, or refinancing to get more time to pay.