blog

So you want to buy a car. You’ve done all the research, chosen the make, model, year and all the extra’s you want. But then comes the moment of truth – how are you going to pay for it? You have two options; car leasing or buying. Most people don’t buy a car outright with cash, so in this instance we’re talking about buying as financing your car with a loan. So with that in mind, car leasing versus buying… what’s the better option?

As with most things, there are pros and cons to both options, and what you decide depends on your personal situation. The key questions to immediately ask yourself are…

– Is the car being used for business purposes?
– How long do you intend to keep the car?
– Would you prefer higher repayments and/or a longer term to own the car outright? Or smaller repayments over a shorter period, then turn over the car for a new model and continue to pay?

WHY DO PEOPLE BUY?

Those who buy a car with finance (car loan, mortgage top up or dealer finance) usually do so when they intend to keep the car for more than five years and don’t want to be locked into a set period of ownership, use the car primarily for private use, and want to eventually own their car outright with no further repayments.

At the end of the finance term they own their car with nothing further to pay. However, because it’s taken five to 10 years to pay off the car they are left with an older car that costs more to maintain. The options are to continue to maintain an older car, or go back into the loan cycle.

WHY DO PEOPLE LEASE? 

The most common reasons people lease are because they either use the car for business purposes or they prefer a new car every few years and are comfortable to continually pay finance terms for each car (never owning a car outright).

At the end of the term (up to five years) they owe a residual amount (called a balloon payment) that transfers to the new car. Once they have the new car, they continue to pay a monthly repayment. This means they never own their cars outright.

CAR LEASING VERSUS BUYING                                        

So, which is better? In the table below we’ve put the facts on car leasing versus buying side-by-side so you can see how they stack up…

BUYING	LEASING
FINANCE OPTIONS
• Car loan • Mortgage top up • Personal loan • Dealer Finance	• Novated lease • Operating lease • Chattel mortgage
REPAYMENTS
Higher monthly repayments and/ or a longer loan term. TIP: Use a Loan Calculator to calculate your repayments.	Smaller monthly repayments over a shorter loan term. TIP: Use a Car Lease Calculator to calculate your repayments.
INTEREST RATE
More expensive unless topping up a mortgage.	Typically cheaper.
FINANCE TERM
Long terms available (dependent on how you nance).	Maximum 5 year term
END OF TERM
Own the car outright.	Owe a residual amount (called a ‘balloon’), typically up to 40% of the original purchase price of the car. Depending on the type of lease, at this point you either have to return the car, pay out the residual amount or trade in the car and commence a new lease.
MAINTENANCE
Your responsibility and cost. The longer you keep the car, the more you will spend on maintenance and repairs as more will need to be done to an older car.	Depending on the lease you choose, some lease options manage the cost for you to help you budget but, as a result, place some restrictions on your maintenance options. Newer cars also cost less to maintain.
PERSONALISATION
Freedom to modify.	Some leases place restrictions on modifications such as tow bars, window tinting and roof racks.
UPGRADES
No upgrades	Upgrade your car every 2-5 years
BUSINESS
The percentage of business use can be claimed for all expenses; however, the amount of depreciation that can be claimed reduces the longer a car is owned.	The percentage of business use can be claimed for all expenses. As cars are typically kept for a shorter period, the amount of depreciation claimable is higher.

So what does that look like in a real scenario? Below is an snapshot of leasing versus buying for a Toyota Camry:                         

Toyota Camry	Buy	Lease
Purchase price	$30,490	$30,490
Loan Term	10 years	5 years
Interest rate	8.5%	6%
Monthly repayment	$378	$412
Residual	$0	$12,196 (40%)
Maintenance costs	$10,846	$3,292
Depreciation claimed as a business expense (60% business use)	$2,613 p.a. (max. 7 years claimable)	$3,659 p.a.

In these examples the same new car was purchased at the same price. This car could be purchased with a standard car loan over a 10-year period. Because the loan term is long, the monthly repayments work out slightly cheaper than leasing. The owner would also own the car outright when it’s 10 years old. The downside is they have paid more on maintenance (negating the lower finance payments) and, if using the car for business, they have been able to claim less in depreciation.

If the car was leased the owner would pay slightly more in monthly repayments and at the end of 10 years would still owe over $12,000. The plus side is they have owned two new cars over the same 10-year period (with a new car warranty each time) and as a result have spent less on maintenance, and if they can claim for business they’ve claimed more than double in depreciation over the 10-year period.

While there is a cost difference between the two, it is negligible over the long term due to the lower monthly repayments and maintenance costs of leasing, versus payments ceasing entirely once the loan term is up when you buy a car while maintenance costs increase.

WHAT’S RIGHT FOR YOU?

Taking everything into consideration, whether you buy or lease will come down to how long you intend to keep your car, whether you can claim some expenses for business purposes and whether you want to eventually own the car outright and not be tied to a finance agreement.

Generally, leasing is the best option for people who can claim business expenses, want lower monthly repayments and/or want to turn over their car on a regular basis. Before making a decision, it’s worth weighing up the costs against each option using a Car Lease Calculator  and Loan Calculator. Further, if you’re using the car for business purposes, it’s definitely worthwhile speaking to your accountant before diving into anything.

Ultimately, whether you buy or lease will come down to your personal requirements and preferences, but hopefully we’ve armed you with the tools to get to that decision.