Car Finance Options… Should You Lease or Loan?
October 24th, 2016
There are so many car finance options out there that it can be difficult to decide on the best option to suit your situation. A common question we receive from our clients is whether they should lease or loan a car. We thought we’d make this decision a little easier by going through the differences and advantages of each option.
What’s the difference between these car finance options?
When you take out a loan for a car, you make payments that allow you to own the car at the end of the repayment period. When you lease a car, however, you are simply paying for the use of the car and not for the car itself. So, once the lease term is over, you hand the car back. In most cases, it is possible to make a residual payment and purchase the car at the end of the lease period if you so desire.
Which option is best for you?
There is no set answer, but it’s important that you understand the advantages of each option before you make a decision. In our experience, most clients who are purchasing a vehicle for personal use decide to take out a loan (and therefore eventually own) a vehicle, because it gives them more freedom in terms of their vehicle use, ownership and customisation. Most businesses, however, choose to lease a car, because it provides them with flexibility, opportunity for upgrades and less overall commitment to a particular vehicle.
Loaning a car
- You have total freedom of choice when it comes to the vehicle you choose and you have more freedom when it comes to your use and personalisation of the vehicle.
- Car loans make it easy to buy. You make a set number of monthly repayments, and at the end of the loan term (usually 3-5 years) you will own the vehicle outright.
- You have more repayment options (residual payments, fixed or variable rates, a wide range of available contract lengths, etc.).
- The loan is secured against the vehicle, which reduces the interest rate and your out-of-pocket costs.
- You get to own a car without delving too far into your savings.
Leasing a car
- Less cash is required upfront than if you were to buy and there are lower monthly repayments.
- A single consolidated payment per month (which includes a maintenance package) can be beneficial in terms of managing cash flow.
- The amount payable is predetermined, so you won’t be caught out with unexpected bills and will be able to manage your finances easily.
- There are potential tax benefits (for businesses).
- You are not committed to permanently owning the vehicle.
- You may have the option of buying the vehicle after the lease term is over by making a lump sum payment known as a residual.
- You have the opportunity to upgrade the vehicle and stay up to date with the latest car technologies.
- No GST. You’re leasing, not buying, so you won’t need to deal with the extra payments that come with the purchase of a vehicle.
- Flexibility – the length of the loan can vary.
- Leasing cars is popular amongst businesses because they provide employees with cars without the business having to make a substantial investment in a vehicle, which is a depreciating asset. With all the benefits of short-term ownership but without the high cost, a car lease is one of the most flexible car finance options available. Other pros of car leases include:
There is no right or wrong answer and no overall ‘better’ option. It all comes down to which option suits your particular situation the best. Do you want to permanently own a car? Or do you just want the use of a car for the meantime? When it comes to which car finance options you should choose, make sure that you consult an accountant, a financial advisor, or one of our experienced, honest and friendly consultants before making your decision.