Leasing vs buying a car.

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 about which funding option suits 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 and fees on finance
• Fuel
• Tolls
• Parking
• Cleaning

While not all these costs are compulsory, 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 remain the same over the term of the loan.

If you give the car as security, you may get a lower interest rate, however your lender is likely to require you 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 may be lower than loan repayments as you are not paying off the full purchase price of the car. There is likely to 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 and include them 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 and you pay the lease payments out of your before-tax income. However, there may be Fringe Benefits Tax implications so before choosing this option talk with your tax advisor to see if it suits your situation. You will also need your employer’s agreement before pursuing this option.

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 30 days or longer in return for paying a weekly fee. This service generally covers 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.

Which method may suit you?

The final decision of which method suits you will be determined by your current personal and financial position, what your future holds, and what works well for you.

If you’re unsure of your future regarding 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 more suitable.

If you don’t 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 a good option. But remember, even though the monthly payments may be lower, it doesn’t mean it is costing you less. It may mean 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 work 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, and choose when you want to do it, then saving or an unsecured personal loan may be a choice for you.

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

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.