Lease or buy?
If you’re in the market for a new car, one of the key decisions is whether to buy or lease the vehicle. There are important differences between leasing and buying a car, and it’s worth having a good idea of how each option works to make the right choice for you.
Differences between buying and leasing
Buying is simple
It’s straightforward, and it means you can do whatever you like with the car because it’s yours.
Car loans make it easy to buy
A car or personal loan remains a popular form of vehicle finance. You make a set number of monthly repayments and at the end of the loan term – usually three to five years, you own the car outright.
Leasing lets you use the vehicle, not own it.
When you lease a car you’re paying for the use of the vehicle over a set term. Depending on the type of lease, you may have the option of buying the car once the lease expires by making a lump sum payment known as a ‘residual’.
Two main types of lease
Broadly speaking there are two main types of lease – a ‘finance’ lease and an ‘operating’ lease. An operating lease is like a rental agreement – once the lease term ends you hand over the vehicle and no longer make any payments.
A variety of finance leases
Finance leases are a little more complicated. You pay a set monthly lease payment, and at the end of the lease term you can choose to pay the residual value of the car, or swap the lease over to a new vehicle and continue making monthly payments. Finance leases are popular among businesses because it’s a way of providing employees with cars without making a substantial investment in vehicles, which depreciate rapidly.
With a novated lease, you – not your employer, take out a finance lease on a vehicle, and your employer makes the lease payments out of your before-tax salary. This type of salary packaging can reduce your taxable income, making it cost-effective for both parties. The downside is that if you lose your job you become responsible for the lease payments, and there is no guarantee your new employer will agree to pay the lease payments on your behalf.