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Lease
or Buy
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It's time for a new car and having made the
decision to buy, the next question is often
not what car, but how you are going to pay for
it.
In determining what finance product is best
for you, you first have to decide whether you
should buy or lease. The essential difference
here is that if you buy a car, you own it and
it is yours to do with as you please.
Leasing a car means that you are only paying
for the use of the car and at the end of the
lease term, officially, you have to hand it
back or take out another lease. The legalities
get a bit murky here and in practice, it is
possible to buy the car at the end of the
lease period under certain types of leasing
packages but we will go into that later.
There are no hard and fast rules as to whether
leasing or buying suits people better and it
is a topic that should be discussed with an
accountant. But having said that, if you use
your car for business and private purposes or
your employer is willing to include a car as
part of your salary package, then leasing is
well worth looking at. There can be
significant tax advantages especially for cars
in the prestige and luxury sectors.
Although leasing has taken off in the private
sector to a large degree in the US and Europe,
we still have an ownership culture and while
the numbers of private or semi-private lease
deals are growing, the vast majority of people
here still buy their cars and own them.
TYPES OF PURCHASE FINANCE
Hire purchase/Consumer Loans
The most common product sold is still the
traditional hire purchase or consumer loan.
The period of the loan is determined, the
interest rate set according to the risk, the
value of the loan and market conditions and
the monthly repayments are set to pay out the
full amount by the end of the term. Terms
usually vary between one and five years.
A variation on the hire purchase product known
as the balloon payment option is also slowly
growing in popularity.
By setting a larger balloon payment for the
end of the term which can vary according to
individual circumstances, you can reduce your
monthly payments to better balance the budget.
At the end of the term, you can either pay out
the full amount in one hit or refinance the
balloon amount and continue paying off the car
in monthly instalments.
TYPES OF LEASE FINANCE
Lease products fall into two categories as
either a finance lease or operating lease and
vary in the way they treat ownership, disposal
and residual risk on the vehicle.
Finance lease
As a lease, no deposit or trade-ins are made
and the monthly payments are worked out based
on the term of the lease, interest on the
finance charge and the residual value of the
car at the end of the term.
However, you are the one who takes the risk on
the residual and if at the end of the term the
market says the car is not quite worth what
was expected three years earlier, then the
responsibility to make up the difference to
finalise the contract is yours.
Although under the definition of a lease you
gain no equity in the vehicle, it is common
practise under finance leases to make an offer
for the vehicle at the end of the term and pay
out or refinance the residual to take
ownership.
Novated Lease
Novated leases are becoming a very popular way
of including a car as part of your salary
package to help reduce your taxable income.
You take out a standard finance lease on a
vehicle of your choice. You then arrange for
the lease payments to be paid by your employer
through a novation agreement which remains
valid as long as you stay with the company.
The lease payments, running costs and fringe
benefits tax any car supplied to an employee
for their private use is subject to FBT
calculated on a sliding scale depending on the
value of the vehicle and annual kilometres
travelled are then taken out of your pre-tax
salary.
If you resign or the words forced redundancy
start being bandied about in the canteen, then
the responsibility for the vehicle and the
subsequent lease payments reverts to you. |
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Useful
Information