As the term suggests, under most car lease agreements you are essentially renting your car. However, car leasing comes in a number of shapes and sizes and navigating the options can quickly become confusing. There are four main types of car leases available in Australia, each with their own host of pro’s and con’s. Below you’ll find what you need to know about each…
- Novated lease
This is an option available to some salaried employees, allowing them to use pre-tax income to make lease payments on their vehicles. An agreement is made between the lessee, their employer and a financier. By allowing the individual to use pre-tax income, a portion of which would otherwise be lost to taxes, taxable income is reduced. Some agreements may allow for the inclusion of regular operating costs like tyres, fuel and servicing. Under this arrangement a Fringe Benefit Tax (FBT) is payable. The FBT rates have continued to increase over recent years, negating most of the benefit of novated leases, therefore this type of lease has become less popular.
- Finance lease
Commonly used by businesses, the vehicle is actually bought by a financier and then rented out to the lessee for a monthly instalment. At the end of the lease term the residual amount still owed is the responsibility of the lessee. The car owner may cash out from personal or borrowed funds, owning the car outright, or trade in the vehicle and start a new lease.
- Operating lease
Essentially the same as a finance lease, except that at the end of the lease term the lessee is not responsible for the residual left on the vehicle as the vehicle is returned to the financier. Tyres, petrol and maintenance costs can also be included as an all-inclusive package. This can be great for budgeting, however you may end up paying more as you have no control over expenses and the financier will take a cut. You may also have restrictions on the number of kilometres you can drive and the modifications you can make to the car.
- Chattel mortgage
A popular alternative to a traditional lease whereby the car is owned by the purchaser rather than the financier, with the purchaser taking out a mortgage using the car as security. This is a popular option for small businesses as the total GST of the purchase price can be claimed in one lump sum when the car is purchased and interest and depreciation costs can also be claimed. Like a lease, a residual can be negotiated to reduce the monthly repayments, which will then need to be financed at the end of the term, or a new lease started on a new car.
The finish line: Car Leasing is becoming increasingly popular, especially amongst those who can claim business expenses. Whether it’s the right option for you will come down to your personal preferences and lifestyle. My advice; weigh up the costs and restrictions and speak to your accountant to ensure you find the option that best suits your circumstance.
For more information about leasing or buying a car, head to Cars 101 – Your ultimate guide to owning a car.