Leasing a Car in 2020: This Is When Leasing a Car Is Smarter Than Buying Outright
If you are in the market for a car, you basically have two options — either lease or buy. Deciding between leasing a car and buying one might be tougher than you thought. In most cases, it is not just a simple matter of finances; there is a lot more at play, including convenience, obligations, luxury, and car ownership responsibilities.
According to Statista and Research and Markets, more and more Australian motorists are warming up to the idea of leasing vehicles. The fleet and private car lease industries are growing incrementally year after year. But even so, a deal where you drive away in any car without a purchase commitment and trade it in for a new one after only two or three years might seem too good to be true.
There must be a catch — what are the pros and cons of leasing a car vs buying? More importantly, what is leasing a car? Well, there is no catch. Here are the basics of car leasing in plain black and white.
How does leasing a car work?
You are probably already familiar with how to go about buying a car using loans or other financing methods. But leasing is a lot different from buying. You basically ‘rent’ a car for a certain length of time, usually 2 to 4 years. Once the lease period expires, you can renew or extend the lease, purchase the vehicle at its residual value, or trade it in for a newer model.
The car dealer or car finance provider only asks for a monthly lease payment, which, depending on the lease contract, can be paid by your employer, your business, or from your pocket.
Keep in mind that you have to be eligible for car leasing. Some of the qualification factors include your credit score, income, and employment history.
Car Leasing in Australia
Before leasing a vehicle, it helps to know all the options available to you. There are three general types of car leases in Australia, and each suits particular kinds of car buyers.
1. Novated Lease
This is a popular leasing arrangement among salaried employees. It is a three-way contract between an employee, employer, and a car dealer. The dealer provides the car, and the employer deducts monthly lease payments from the employee’s taxable income. The deductions also cover operational costs such as maintenance, fuel, and insurance.
Novated lease is quite economically sound because it lowers your taxable income and redirects funds that would otherwise be taxed toward financing a car. Use our Novated Lease Calculator to find out how much you could save on a lease.
2. Finance Lease
Finance lease is mostly used by businesses. A financier purchases the vehicle and leases it to an organisation in fixed monthly instalments. At the end of the lease term, the lessee is obligated to pay the residual value of the car and assume its ownership or renew the lease for another run.
3. Operating Lease
An operating lease is similar to a finance lease, except in this case, the lessee does not have to make a balloon payment after the lease period expires. The vehicle is simply handed back to the financier at the end of the lease term.
Pros and Cons of Leasing a Car
Leasing is quickly becoming an alluring alternative to buying a new car, especially for the working class that can take advantage of novated leases. Many motorists seem to prefer subtle monthly payments rather than commit to a car loan or make a massive investment in car ownership. However, there are two sides to leasing cars:
- You are not paying GST on running costs and the purchase of the vehicle.
- Large discount on the purchase price due to the buying power of the (Novated) Leasing company.
- No deposit required.
- There is no obligation or commitment to buy the car after the lease period ends.
- Enjoy stress-free car maintenance and upkeep.
- You save money on taxes via novated leases.
- You get to drive high-value cars that you would otherwise not afford.
- You do not own the car and therefore cannot use it as an asset, for instance, to secure a loan.
- Most lease contracts do not allow for any vehicle modifications.
- In the long run, leasing might be more expensive than buying a new car in the first place.
- Lease cars have strict mileage caps and heavy penalties for exceeding set limits.
- Terminating a lease contract prematurely may attract hefty fines.
Pros and Cons of Buying a Car
Buying a car presents several benefits and privileges as well. But there are also some conveniences and financial shortcomings tied to purchasing and running your own vehicle.
- Once all the payments are made, the vehicle is solely yours.
- You can modify and sell the car whenever you like.
- There are no driving restrictions (same applies to novated leases).
- You have to deal with high monthly payments and substantial upfront investment
- You are responsible for the vehicle’s upkeep and running costs.
- You have to bear the depreciation and hustle for good resale value.
- Your purchasing power may limit your vehicle options.
Leasing vs Buying a Car: Which Is Right for You?
For some motorists, the decision to lease is purely based on affordability, while for others, it is a matter of priority or convenience. Most of those who opt to buy do it to enjoy the privilege of owning a car or an emotional bond with the vehicle. For the most part, it comes down to you to justify why leasing a car is smart or why leasing a car is a bad idea.
That said, it is important to weigh your options carefully and make all the necessary considerations when deciding to either buy or lease. Examine your lifestyle, job situation, and financial status to determine the right way to go. Sometimes you have to make sacrifices in some places, such as reducing your spending on branded gym wear or dining out less often.
If your commute is only necessitated by a temporary job or contract, then it probably makes more sense to lease rather than buy. On the other hand, versatile and long-term transportation needs might require a more permanent solution. Plus, there is no problem with buying one car and leasing another if the merits of both arrangements complement each other.
If you go for a lease, it is best first to understand what you are getting into. Read the fine print thoroughly before signing on the dotted line. Make sure you understand and agree with all the lease terms and conditions, including details about insurance, pricing, tax benefits, warranties, penalties, and other particulars.