Apart from car loans and paying upfront with cash, many Australians use an alternative method to pay for their car: a car lease. A car lease is the process of ‘borrowing’ a car and making regular payments over a set amount of time. Payments are usually between two to five years.
Much like renting a home, leasing a car doesn’t really grant you full ownership rights of the vehicle. There could even be restrictions behind how it can be used. However, while a leased car isn’t necessarily owned by you, it can offer some advantages.
In this blog, we’ll run you through some of the basics of car leasing and whether car loans might be a better option for you!
A novated car lease is a type of lease that’s considered to be an agreement between three different parties. Those three parties could include an employee, the employer, as well as a financial organisation. For instance, the employer could agree to make the car lease payments to the financial institution from the employee’s salary.
Additionally, the activity from this type of lease could attract fringe benefits tax. This is typically payable by the employer. The car won’t need to be used by the employee for work purposes, meaning it could also be for personal use. Therefore, most employees can be eligible for novated leases if they have the approval of their employer. The lease could also ultimately include other operating costs such as insurance, fuel, or maintenance.
Once the lease comes to an end, the employee has the option of either keeping the car after making a balloon payment, or selling/trading-in the car and potentially leasing a new model. The employee also has the option of extending the lease on the car they currently have.
Cars that are used by businesses and organisations can be paid for via a finance lease. This is where the car is purchased by a financial organisation and then rented out to a lessee over a certain period. Unlike a novated lease, at the end of the finance lease period, the lessee only has two options. They can either purchase the car fully from the financial company by paying the remaining amount, or they can lease the car again.
An operating lease is rather similar to a finance lease. However, the only difference is that the lessee isn’t responsible for paying off the residual value at the end of the lease term. Instead, the car gets given back to the finance organisation. There are some businesses with a high turnover of cars that use operating leases. This is done merely to reduce the administration costs involved.
When you lease a new car, you’re typically paying for the car while it depreciates. A car’s market value typically decreases by almost 60% in just the first few years of its lease. This is when car loans are usually a better option. Additionally, if you constantly take out a lease on a new car, at the end of every lease term you will essentially be paying the costliest price on the car.
The longer you drive a car, the more money you’d be saving by financing it as opposed to leasing. It’s best to stay aware of agreeing to leasing a car if you’re hesitant on committing to the terms over the entirety of the lease. If you end up wanting to end a lease early, then you may have to pay the entire remaining lease on top of the residual value.
Keep in mind that car leases can also have a similar process to car loans. This means that car leases will also require a credit check. Therefore, if you believe your credit score is poor, then you could be denied a car lease.
Jacaranda Finance is an online lender offering personal finance and car loan options. If you’re on the hunt for a car loan, we could help you access up to $35,000. Best of all, it’s free to apply. So, scroll up now to begin your application!
You can also read up on car loans over on the government’s MoneySmart website.
How does a car loan balloon payment work? Find out with Jacaranda Finance!
Jacaranda is 100% online. So, we do not accept applications over-the-phone. However, our friendly team is more than happy to answer any questions you may have.