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What is a car lease?
Similar to renting a place to live, a car lease is a contracted agreement under which you pay a fixed monthly payment (or, a rental fee) to a lender, for the use of a car over a set period of time.
How does a car lease work?
The way car leasing works is simple.
- You choose a car.
- A financing company buys it on your behalf.
- You lease the car from them for a set monthly fee over a predetermined period of time, generally between two and five years.
- When your contract ends, the financing company will maintain ownership of the car. At this point you will typically have the option to either extend the lease or purchase the vehicle by way of a balloon payment.
Is it better to lease a car or get a loan?
The right decision for you will always depend on your own financial situation. When you’re comparing car loans and car leases, you should consider a number of factors including your income, employment status and whether you're willing to pay for a car that you won't own.
What is the difference between a car lease and a car loan?
Car leases are essentially rental agreements. However, unlike holiday car rentals, car leases can last between two and five years. A short car lease term requires higher monthly payments, but you’ll be able to move to a new lease and upgrade to a new model sooner.
The monthly payment for a long term lease is typically lower than the monthly repayment to buy the car outright, which is why long term car leases can be appealing. However, other regular expenses attached to a leased car can be more expensive, particularly insurance, which can often be an expensive policy chosen by the dealer.
Unlike owning a car, leases come with a number of restrictions on use, including maintenance and alterations. Plus, you only possess the car temporarily - you will never own it.
Car loans, on the other hand, involve borrowing a principal amount to cover the cost of buying the car. You then pay back this amount plus interest and any fees and charges over an agreed loan term. Car loans can be both secured and unsecured, and the borrower decides whether they would like to use collateral against the loan to reduce the risk to the lender. By doing this, you will be able to get a lower interest rate, so many borrowers choose secured car loans.
Car leases, however, are always secured by the car itself as you do not own the vehicle outright. This is why if you get a car lease, you will have much cheaper repayments than those under a car loan.
Don’t forget that while car leasing repayments may be cheaper than loan repayments, you are not building any equity in the car you are leasing, and you will not own the car outright. If you decide you want to buy the car, your lease repayments do not count toward the price of the vehicle.
- Repayments: A leased car may have cheaper repayments than if you took out a car loan. This is useful if you are an undisciplined saver. Leases also often have lower interest rates than car loans.
- Budgeting: You know what the repayments will be each month, as these will have been agreed with the lender, and they are often cheaper than car loan repayments.
- Package deals: Many lease packages come with maintenance, repairs and insurance included. If the repairs are mechanical faults, not consumer driven faults, the car’s owner, not you, needs to pay for them.
- Potential ownership: 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.
- Latest models: You can switch your car every few years to upgrade to a new vehicle without having to take on the full depreciation costs of the previous model.
- Early exit fees: Leaving a lease early means you have to pay out the remaining lease payments and the residual value of the car.
- More expensive: Multiple car leases for the one car are often more expensive than getting a car loan to buy that car outright.
- No alterations: With car leases, you cannot improve or alter the car as you do not own it.
- Driving restrictions: Many leases have restrictions on how many kilometres you can drive and how much wear and tear the car endures.
- Additional costs: Add-ons like insurance are chosen by the dealer and can be very expensive and not be the best option for your situation. Breaching restrictions on driving or alterations or wear and tear will attract extra costs.
What is a novated car lease?
A novated lease is an arrangement between an employee, their employer and a lender, in which 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.
What are the steps involved in a novated lease?
- You choose your car with your employer and supplier, and organise a car lease.
- Your employer makes lease payments on your behalf, deducting them from your salary prior to you being paid, and prior to being taxed.
- Your taxable income is reduced, so you pay less tax at or get a bigger refund at tax time.
Before you apply, make sure you look at all the factors so you can make the best financial decision for you.
What is the difference between a fully maintained novated lease and a non-maintained lease?
A fully maintained novated car lease is a salary packaging option under which the car lease repayments and general running costs are collectively paid to the lender by the employer, out of the employee's pre-tax income.
These running costs often include anything from servicing, registration, insurance and even fuel, depending on the individual agreement. A fully maintained novated lease can save the lessee the hassle of budgeting for lump sum running costs, and instead enjoy the convenience of having regular monthly instalments paid on their behalf alongside the lease repayments.
Under a non-maintained lease, only the car lease repayments are made from the employees pre-tax income, meaning running costs are an additional expense that the lessee will be responsible for.
What are the benefits of a novated lease?
- As your car lease repayments are paid directly out of your pre-tax income, novated leasing can help you to effectively reduce your taxable income.
- If you choose a fully maintained lease, your running costs will also come out of your pre-tax income, further reducing your taxable income.
- A fully maintained lease will also provide you with the convenience of not having to budget separately for, and manage, things like insurance and registration.
- As a business owner or sole trader, your car lease repayments will typically be tax deductible if the car is leased for business use.
- If your business needs change and a different car would be better suited, you won't have the hassle of selling the car and buying a new one.
- Once the lease agreement has ended, you can simply choose the most suitable car for a new lease.
What are the disadvantages of a novated car lease?
- If you were to lose your job, or your business, while you had a novated car lease, the lease would become a consumer lease, meaning you will lose the benefits of tax deductions.
- Full maintained car leases do not allow you to choose your own insurance, so you may be stuck paying for an expensive car insurance policy, and this will carry on regardless of whether you lose your job and the lease changes to a consumer lease.
- If you damage the vehicle or drive more than the stipulated kilometres during your lease, you'll have to pay excess charges when the lease term ends.
What documentation do you need to supply for a novated lease?
The documentation needed to secure a novated car lease differs slightly from the documentation required for a standard lease. This is mainly because this is not a consumer lease, but a lease that involves an employee, employer and supplier agreement. As there are tax deductions that benefit the lease, you’ll need:
- Signed copy of your lease quote (signed by both you and your employer)
- Completed novated lease application
- Your insurance declaration form
- Privacy and consent declaration
- A copy of your driver’s license
- A copy of your most recent pay slip
- A copy of your rates notice or rental agreement which indicates where you live
Can I get a low-doc car lease?
If you're a business owner or sole trader and your business is in its early stages, you might not have a lot of documentation. Some financiers will consider low-doc applications in these instances, and instead look at other areas of your business to determine whether you are in a suitable position to meet repayments on a lease.
How to apply for a car lease
If you do not want to own the car outright, and have decided that a car finance lease is the best option for you, the next step is to apply for the car lease of your choosing.
Ahead of submitting your application, it’s important to gather the necessary documentation, to reduce your chance of rejection. Being rejected from a credit application can have a negative impact on your credit rating, so for your benefit, it’s best to be prepared.
Proof of Identity
If you’re getting a car lease, you will need to prove that you are who you say you are. The following identity documents can help you with this:
- Driver's license, passport or proof of age card
- Birth certificate or citizenship certificate
- Proof of Australian residency
- Medicare or credit card
- Concession or pension card
- Utility bills or bank statements
Proof of Income
To prove to the lender that you can meet your car lease repayments, you can provide income documents including:
- Pay slips if you are a full time, part time or casual employee
- Previous years’ tax returns / notice of assessment if you are self-employed
- Rental income receipts (if you currently own a rental property)
- A letter from your employer can help your application
- Bank statements, usually at least three months
- Superannuation statements, especially if you receive income from your super fund
- Any other document that shows you receive regular income
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Financing a car through a business
If you run a business, there’s a good chance you may require cars for transportation and logistics. And if you’re looking for finance options, you have a variety of vehicle loans to choose from. What works best for you will depend on your financial situation and business requirements.
Personal Finance Editor
Georgia Brown is a Personal Finance Editor and journalist for RateCity. Before venturing into the world of personal finance, she worked as a reporter for realestate.com.au and Smart Property Investment. She now works truly amongst personal finance, while also writing about other areas, such as sustainable finance and super.
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Frequently asked questions
What is a car lease?
A car lease, also known as an asset lease or finance lease, is an arrangement by which a finance company buys a car on your behalf. You get to borrow the car in return for making regular payments to the financier. At the end of the lease, you can either buy the car or hand it back.
What is an asset lease?
An asset lease, also known as a finance lease or car lease, is an arrangement by which a finance company buys a car on your behalf. You get to borrow the car in return for making regular payments to the financier. At the end of the lease, you can either buy the car or hand it back.
What is a finance lease?
A finance lease, also known as an asset lease or car lease, is an arrangement by which a finance company buys a car on your behalf. You get to borrow the car in return for making regular payments to the financier. At the end of the lease, you can either buy the car or hand it back.
What is a novated lease?
A novated lease is a car lease that is ‘novated’, or transferred from one party to another. Novated leases are often used when companies provide a car as part of a salary package. The employer signs for the lease and makes the lease payments, but the employee assumes the responsibility of looking after the car. While most car leases involve two parties, novated leases involve three – employer, employee and financier.
What is an operating lease?
An operating lease is an arrangement by which a company leases a car from a vehicle fleet supplier for a set period. It’s a bit like a long-term car rental in that the company gains access to the car but the supplier retains ownership. Companies like operating leases because they are tax-deductible and because they save the company from having to make a large upfront payment to buy a car.
How much is your car worth?
If you already own a car, you could potentially bring down the cost by selling your car in the process. Before that happens, though, you’ll need to find out how much your car is worth.
One of the first places to find this value is to research the value of your current car, giving you an idea of roughly how much it’s worth in its peak condition.
There are plenty of websites that offer a free online valuation, allowing you to enter your car’s make, model, year, badge and description, with results listing a price guide based on both selling your car privately and through a dealership.
Of course, dealerships will try to profit on your trade-in by buying it for less than they can sell it, making it highly unlikely that you’ll get the same price selling a car to a dealer as you would selling a car privately.
However, private car sales can be costly and can take months to sell, making car trading more convenient with a guaranteed return, even if you may not be able to realise the total value of your car’s worth.
Remember that everything is negotiable. If the dealership is offering you less for your trade than you wanted, try to negotiate elsewhere to gain that money back. Start by negotiating on the price of the trade and then ask them if they can give you a further discount on your new car.
How much is my car worth?
If you own a car, it may be something that can help you bring down the cost of your next vehicle purchase through its sale. However, before you can do that you’ll want to find out how much your car is worth.
Your car’s worth can depend upon various aspects, including:
- Model and make
A great starting place for aspects of this includes websites that offer online valuations, allowing you to enter your car’s make, model, year, badge and description, with the listed results displaying a price guide based on both selling your car privately and through a dealership.
Both have pros and cons, as cars can be very profitable, something that will no doubt impact any chance you have to make the most of your car’s value upon sale. Dealerships will try to profit on your trade-in by buying it for less than they can sell it for, so you shouldn’t expect the same price selling a car to a dealer that you would necessarily get selling a car privately.
How do you get a car loan?
There are four different ways you can get a car loan. You can go straight to a lender. You can get a finance broker to organise a car loan for you. You can get ‘dealer finance’ – which is when the car dealer organises a car loan for you. Or you can organise your own car loan through a comparison website, like RateCity.
Whichever method you choose, you will need to provide proof of identification, proof of income and proof of savings. So you may be asked for any combination of passport, driver’s licence, bank statements, payslips, tax returns and utility bills. You might also be asked to provide proof of insurance.
Can I buy a car as a student?
Buying a car is a huge financial decision, and shy of marriage and purchasing a house (or perhaps around the world travels), it may be the biggest financial decision you make. But if you’re looking at your empty pockets, don’t despair! Your dream of owning your own car could become a reality, if you look for and compare the right car loans for your circumstances.
How to get a chattel mortgage?
Both businesses and individuals may use a chattel mortgage, provided that the car is being used predominantly for business purposes.
To apply for a chattel mortgage, you need to first consider your options and choose a suitable lender that meets your requirements. Once you have selected a lender, you can apply for the loan online by filling out a form. If the lender doesn’t offer an online application process, you can either call them or visit their nearest branch.
After you’ve applied, the lender will ask you to supply documents that confirm your identification, income, job profile, etc. If everything is in order, most lenders will arrange the loan’s settlement, so all you need to do is pick up your car!
What is a car loan?
A car loan, also known as vehicle finance, is money that a consumer borrows with the express purpose of buying a vehicle, such as a car, motorbike, van, truck or campervan. Car loans can be used for both new and used vehicles.
What is a secured car loan?
A secured car loan is a loan that is connected to a form of security, or collateral. Generally, the security for a car loan is the car itself. If you fail to repay the loan, the lender might seize your car, sell it and then use the proceeds to recover their debt.
How to apply for pre-approval of a car loan from RACV?
If you’re planning to apply for a car loan with RACV, the best way to start is by having a clear picture of your requirements. By getting pre-approval on your car loan, you’ll be able to go shopping for your new car with a definite budget that will help you narrow your search. Once you’ve decided to buy a car with the help of a loan, you may have even identified the type of car you would like to purchase, you can seek pre-approval on a car loan from RACV.
You can apply for pre-approval by filling out a form online and uploading the relevant documentation regarding your identification, income, debt and credit history. Once you submit your application, RACV will review and verify the documents. If you meet their eligibility criteria, you will get pre-approval for the amount they are willing to lend to you. With this pre-approval, you can go car shopping with the confidence of knowing what you can afford.
What is residual value?
The residual value of a car is how much it will be worth at the end of a lease period. Finance companies need to calculate a car’s residual value before they can know how much to charge during the lease period. For example, if a financier calculates that a $30,000 car will have a residual value of $16,000 at the end of a five-year lease, the financier will know that it must charge $14,000 to break even on the lease – and more to make a profit.
Can I get a car loan with poor credit?
Poor credit doesn’t necessarily mean you won’t be able to get finance for your car purchase, though your options aren’t likely to be the same as someone with good credit.
In fact, a number of specialist lenders exist offering car finance for customers with poor credit, able to provide access to bad credit car loans.
However having a history of poor credit will likely mark you as a potential risk to lenders, so your car financing needs could see higher fees and interest rates. Alternatively, consider a secured car loan, which is a type of loan that uses the car you purchase as collateral, reducing the risk.
Other options include getting someone close to act as a guarantor for your car loan, or to talk to a broker about a personalised rate specific to your circumstances.
Can you get a chattel mortgage with bad credit?
Getting approval for a chattel mortgage with bad credit may be possible, given ‘chattel’ (usually a piece of equipment or car) is put up as security for the loan. That means if you fail to repay the loan, the creditor can recover the loaned amount by repossessing and selling the car or piece of equipment. This differs from unsecured car loans, where the asset is not tied to the loan and cannot be taken if you don’t meet the repayments.
Where can I get a student car loan?
Student car loans are not a necessarily a product in and of themselves, but what you may be looking for is a guarantor car loan.
A guarantor car loan has a third-party act as a form of guarantee for your loan application, telling the bank or lender that if you default on your loan, someone will pay the loan repayments.
Going guarantor on a car loan is no new thing, and before internet-based credit scores, guarantor car loan applicants would apply for loans with a guarantor or property owner who could vouch for the person borrowing the loan.
To get a guarantor car loan, you’ll need someone willing to act as a guarantor for your car loan.
What is dealer finance?
Dealer finance is a car loan organised through a car dealer – as opposed to car loans organised by a finance broker or directly by the lender.
Does my insurance cover other cars I drive?
If you’re driving someone else’s car, say your friend’s, and you’re involved in an accident, whose insurance is responsible, yours or your friend’s? Does car insurance cover driving other people’s cars?
The short answer is yes. A few car insurance providers offer insurance cover for people to drive someone else’s car. It’s always better to double-check this before you get behind the wheel.
If you’re not covered, you can opt for non-owner car insurance which lets you drive someone else’s car and be protected against liability. However, you will not benefit from other coverage such as damage to the vehicle, replacement rental or medical expenses.
Getting comprehensive insurance driving other cars can be done with temporary insurance. It’s recommended that you do this if you plan to drive someone else’s car, even for a short duration. You can choose between policies that cover you for a fortnight, a month or even a pay-as-you-drive option with temporary insurance.
Alternatively, you can ask the car’s owner to check with their insurer if you can be added to the policy. This will ensure that you are covered fully with comprehensive car insurance driving other cars. Do note that adding you could increase the annual premium for the owner.
Can casual employees get car loans from ANZ?
Casual employment is common, and if you are a casual employee, it doesn’t mean that you’re not eligible for a car loan. But you’ll need to prove your repayment capability while applying for an ANZ car loan for casual employees.
Before applying, it’s important to consider the minimum eligibility criteria, which stipulates that a borrower must be an Australian citizen, permanent resident or have a valid visa, is at least 18 years old, and earns an annual income of at least $15,000.
Also, applying for a loan amount lower than what you can afford and working for some months before applying could increase your chance of approval. If possible, consider submitting a letter from your employer that will prove income stability. Lenders are more likely to approve your application if you’re able to demonstrate your ability to save, reducing their risk.