Leasing vs buying a car

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Getting a new car can be wonderful and that new car smell lets everyone know this is your new car. But, if you are buying a car you need to pay for it. Depending on your needs and financial position you could buy the car outright, get a personal or car loan, lease it, or pay by subscription. By understanding the differences between each you can make a more informed decision which funding option will best suits you.

The key takeaways from this article

  • Cost of car ownership.
  • What are the different funding options?
  • What are the pros and cons of each?
  • Which method may be right for you?

Cost of car ownership

Before we get started, whichever funding option you choose it is important to understand all the costs of buying a car in Australia and the cost of ownership as they will all need to be paid by you either directly or as part of your funding arrangement.

  • Purchase price
  • GST
  • Stamp duty / Transfer fee
  • Registration fee
  • Safety checks or pink slip if your car is over 5 years old plus parts
  • Compulsory Third-Party Insurance also known as CTP or Green Slip insurance
  • Comprehensive car insurance to cover accidents, fire, theft and damage.
  • Regular or logbook service and maintenance costs
  • Roadside assistance
  • Tyres
  • Depreciation – an estimate of how much value your car loses each year. Purchase price less depreciation is an estimate of how much you could sell your car for after normal wear and tear. Please note, the ultimate price you get for a used car is determined by a lot of factors and may not be close to its depreciated value.
  • Interest on any form of financing
  • Petrol
  • Tolls
  • Parking
  • Cleaning

While not all these costs are compulsory (although recommended) if you own the car, most will be required if you give the car as security for a loan, lease it or subscribe for it.

 

What are the different funding options?

Savings – You could save up and buy your car outright. You are the owner and can do whatever you want with the car and this may be the cheapest option in the long run.

However, it may take you some time to save enough money which if you want the car now or need it now may not be an option.

Personal or Car loan – A personal or car loan is where you borrow money directly from a bank or finance company to purchase your vehicle.

Loans are typically from 1 to 7 years and if you get a fixed interest rate the repayments will be the same over the term of the loan.

If you give the car as security you will usually get a cheaper interest rate, however you are likely to have to maintain comprehensive car insurance and logbook services.

What is leasing? – Leasing a car is where the lender purchases the car on your behalf and allows you to use it in return for a regular lease payment.

Personal car leasing is generally for 2 to 5 years.

Lease payments are generally smaller than loan repayments as you are not paying off the full purchase price of the car. There will be what is called a residual payment or balloon payment at the end of the lease. This will usually be what the car is estimated to be worth at the end of the lease after regular wear and tear.

You do not own the car and you hand it back at the end of the lease term. You may have the option to buy it at the end of the term or lease it again for the residual amount.

The lender may pay for some of the costs of ownership such as insurance and service costs. These will be included as part of your lease payment.

You may be able to get a tax benefit by getting a novated lease. This is where your employer leases the car on your behalf. You will need your employer’s agreement before pursuing this option.

You pay the lease payments out of your before tax income. However, there may be Fringe Benefits Tax implications. Before choosing this option talk with your tax advisor to see if it is right for you.

Also be aware that if you leave your employer, the lease will become a normal lease payable by you.

Subscription services - A subscription service is where you hire a car for generally 30 days or longer in return for paying a weekly fee.

They generally cover all the costs of ownership except for fuel, tolls and parking.

 

What are the pros and cons of each?

The pros and cons of the funding decision will depend on you and your financial situation.

 

Saving

Car or personal loan

Leasing

Subscription

Ownership

You own the car.

You own the car, although if given as security it may be used to pay off your loan in the event of a default.

You do not own the car. You may be able to purchase the car at the end of the lease.

You never own the car.

Repayments

None – you have put money aside in the past.

Usually monthly although you may be able to make payments more frequently. You may also be able to make extra repayments

Usually monthly. They can be lower than a loan as you are not paying for the full car in the lease term. There will be a residual amount at the end of the lease. This will be paid from the sale of the vehicle.

Usually weekly.

Term

No Term

1 to 7 years

2 to 5 years

As long as you like

Early termination

Sell or dispose of the car when you want.

Sell or dispose of the car when you want. Although proceeds should pay off any remaining loan balance.

There may be early termination fees or you will need to pay out the remainder of the lease. Check with your leasing company

14 to 30 days’ notice to cancel subscription

Mileage

No limits

No limits

May be limited with excess mileage charges.

Limited within different pricing structures and an excess mileage fee charged.

Excessive wear and tear

May affect your future trade in or sale value.

May affect your future trade in or sale value.

You will be charged for any repairs or work needed.

Should be covered under insurance although their will be an excess to be paid.

Customisation such as sound systems, wheels, car parts

At your discretion although may void your warranty.

At your discretion although may void your warranty.

Any customisation will need to be removed at the end of the lease and the car restored to its original condition.

Generally, not allowed.

Costs of ownership

Paid by you directly and you choose which ones to pay and from who.

Paid by you directly and you choose which ones to pay and from who.

Except for fuel tolls and parking, these may be paid for you under the lease. No choice in provider. May be more expensive than you would choose. These costs will be built into your lease payments.

Except for fuel tolls and parking. All are paid by the subscription service and built into your payment.

Tax

If used for business purposes – check with your tax advisor

If used for business purposes – check with your tax advisor

If the lease is a novated lease and/or it is used for business purposes – check with your tax advisor

If used for business purposes – check with your tax advisor

Financing Interest and fees

None

Check you loan contract. Some lenders may look the interest rate look better by charging more fees.

Included in your lease payment. It is a good idea to add up all your lease payments along with the residual amount to work out how much you will be paying.

None – although there is probably an element calculated into the subscription fee.

End of term

N/A

The car is yours.

Hand the car back. You may be liable for any damage or repairs above normal wear and tear. You may be able to purchase it or lease it again.

Hand the car back. You may be liable for any damage or repairs above normal wear and tear.

 

Which method may be right for you?

The final decision of which method is right for you will be determined by your current positioning, what your future looks like and what works well for you.

If you are unsure of your future with regard to where you are living or from a financial perspective, you may not want to be locked into a lease which may have early termination charges. In this case saving, a loan or a subscription service may be better.

If you do not want to worry about insurance, registration, servicing the car and selling the car at the end, then a lease or subscription service may be right for you.

If you want to keep your monthly payment low to get the car you want, a lease may be the right option. But remember just because the monthly payments are lower, it does not mean it is costing you less. It means that a portion of the upfront cost has been pushed to the end of the lease term.

If you only need the car for a short term, say less than 2 years, a subscription service may be better for you, although if you are happy to sell the car yourself saving or a loan may also be appropriate.

If you want full control to do what you like with your car, when you want to do it, then saving or an unsecured personal loan may be right for you.

Whichever is the right funding method for you, leasing v’s buying a car, remember two things, firstly, you will pay for the full cost of car ownership whether directly or within your monthly payments and secondly, and I think most importantly, enjoy you new car. Hopefully it will give you many years of trouble free happiness.

 

This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness or the information to your own circumstances and, if necessary, seek appropriate professional advice.

The taxation position described is a general statement and should only be used as a guide.  It does not constitute tax advice and is based on current tax laws and their interpretation. 

© Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714.


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Rob Lockhart

Rob has helped thousands of people and organisations improve their financial confidence through delivering Davidson Institute short courses and webinars. His career started almost 40 years ago working with a mid-tier accounting firm. From there he moved into banking and has worked with people and organisations. As a CPA grounded in the realities of finance, he brings a unique insight and understanding to the numbers behind our lives.

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