There are both advantages and disadvantages associated with the different financing methods, so to help you decide what is best for YOU I have summarised the basic differences between leases and loans if considering a new vehicle.
A lease is a long term agreement to finance the use of a vehicle for a fixed period of time. At the end of the term you will not own the vehicle. Generally, there are 2 main types of leases:
1- A financial lease – a residual value for a vehicle is set upfront to reflect the vehicle’s value at the end of the agreement. At the end of the term you have no option or right to purchase the vehicle, however Benson Leasing can help negotiate an offer for the set residual value. Under a financial lease you will be responsible for maintaining the vehicle.
2- A novated lease – A business may lease a motor vehicle on behalf of an employee, with the responsibility for the lease lying with the employee. Some employers allow their employees to salary package to a novated lease, with payments will be made from your pre-tax income, and thus reducing your taxable income. Please note that Vehicles salary packaged through a novated lease attract Fringe Benefit Tax (FBT). Then, there are 3 main types of novated leases:
- Novated finance lease: where just the vehicle is leased
- Fully maintained novated lease: where the vehicle and its running costs are included in the lease
- Fully maintained novated operating lease: the vehicle and its running costs are included in the lease and the residual value risk is assumed by the lessor.
Advantages of Leasing:
Preserve your cashflow. You are able to acquire a new car without making the initial cash outlay. Compared to a loan arrangement to purchase the same car, a lease usually requires no down payment.
Lower payments. As you are paying for a portion of the cars full value leasing payments are usually lower than loan repayments.
Reduce tax. When using a salary packaged novated lease the payments are made using your pre tax income reducing your taxable income which in turn reduces the tax you pay.
Increase flexibility. A lease allows you to update the motor vehicle you are leasing every few years.
Maintenance. Depending on the type of the lease the maintenance and running costs of the car are included in the lease.
Disadvantages of Leasing:
Lack of ownership. With a lease you do not actually own the asset, this will prevent you from making any modifications to the vehicle throughout the duration of the lease. At the end of the lease you will have to return the vehicle to the lessor or be required to pay the residual still owing.
Fringe Benefit Tax. The amount of FBT you’ll get charged for your car will depend on the distance travelled each year and its based value (the purchase price excluding the cost of stamp duty, registration and CPT insurance).
Residual value. This value is set by lessor when the lease is established. If at the end of the lease the car is worth less than the predetermined value you will still have to pay the agreed residual value. You will have to pay GST on the residual value if you decide to purchase the car when the lease ends.
Long term legal obligation. A lease is a legal document that carries long term obligations. It can be difficult to cancel a lease agreement and there will penalty fees and costs associated with the cancellation.
A loan is used to finance the purchase of a new car. When buying a vehicle using a loan you are paying for the entire cost of the vehicle in addition to the interest rate determined by the lender. Unlike a lease, at the end of the term and once the loan has been repaid you will own the vehicle.
Advantages of loans
Ownership. You will have the discretion to make any modifications to the vehicle throughout the duration of the loan. At the end of the loan term you will own the car.
Disadvantage of loans
Security. You may be required to use the car or another asset as security for the loan.
Higher repayments. As you are paying to purchase the entire car loan repayments are usually higher than leasing payments (Unless the loan is a traditional home loan which generally charges an interest rate which is considerably less than a personal or car loan).
Loan restrictions. A loan agreement usually includes restrictive covenants that require the customer to maintain certain financial ratios that may restrict the customer’s ability to borrow future funds. In the event that one or more of the covenants are violated the lender has the right to demand payment in full of the outstanding loan amount.
Please note that the above information is of a general nature, and is not given as specific Taxation Advice. We recommend independent Taxation Advise pertaining your individual needs is sought before making any financial or investment decisions.
iLease and its Representatives do not accept any liability for any errors or omissions of information supplied in this editorial.