What is car leasing?
A car lease (or ‘finance lease’) is a form of car finance which enables business owners, employees, contractors or self employed to have the use of a car (or commercial vehicle, motorcycle, or another form of suitable transport) and all the benefits of ownership, with the tax benefits that come from having another company (in this case the finance company) maintain ownership of the vehicle. In short, Car leases operate on the basic premise that the lender owns the vehicle, and the borrower rents (leases) it via monthly payments.
Exactly how does a car lease work?
It’s simple: You find a vehicle you want, the financier purchases it on your behalf and you then lease it back from them for an agreed (and fixed) monthly payment.
When the lease is up, you can either re-finance the residual amount and continue a new lease on that vehicle for another set period, or, pay a final instalment for the ‘residual value’ of the lease and take ownership of the car. You can trade it in and upgrade to a new vehicle.
Read more in this article: How Do I Lease A Car?
What are the benefits of a car lease? Why lease when you could buy a car?
There are several scenarios where it may be better to lease a vehicle than buy one outright, including:
- You get flexible contract terms ranging from 2-5 years
- The interest rate doesn’t change over the lease term
- The monthly payment doesn’t change
- All your costs are calculated in advance
- You can apply a residual amount to the lease (see the above section) which reduces your monthly payments
- If you use the car for business there can be tax deductions that become available to you (check with your accountant), which can include claiming your monthly repayments based on the percentage of business usage, along with the ongoing running costs of the vehicle.
- You can make lease payments in advance, which can be handy at tax time
Read our article on whether to lease or buy a car for more information.
Is car leasing suitable for anyone?
It depends, If you’re using a vehicle for work or business purposes more than 50% of the time, a car lease may be the right option for you. Car leases are suitable for:
- Companies / Businesses
- Sole traders
- Individuals who lease the vehicle to generate income
- Employees who are keen to use a Novated Lease* as part of a salary package
A novated lease allows a business to lease a vehicle on behalf of their employee. Essentially, a novated lease is an agreement between the employee, employer and finance company where the employee enters into a car lease with the finance company, while the employer agrees to take on the payment obligations (which is included in the employee's salary).
The responsibility of the lease falls with the employee, with lease payments deducted from the employee's pre-tax income (also known as salary packaging). If the employment is ceased for whatever reason, the novated lease contract also ceases and any financial obligations are then reverted to the emplyee. Novated leasing is a great way to get the tax benefits of a car lease without needing a separate ABN.
Are There Alternatives To A Lease?
Contact us today to talk to a finance specialist about which option is best for you, or learn more about other business car loan options here.
More Useful Articles
Don't be fooled by 0% car loans
It may cost you more than expected. Read the facts about the dangers of getting locked in to a 0% loan. Read more