Car Leasing Explained – What You Need to Know!

What is a car lease? What are the benefits? Should I use one? These are the most common questions I hear asked about car leases.  Most people have heard about leasing but don’t know much more than that.  So let’s answer those questions and get car leasing explained.  Then you’ll have an idea of what’s involved and whether leasing  a car or equipment is something that might suit your circumstances.Car Leasing Explained

So what is a car lease?

A car lease lets you use a car or commercial vehicle (truck, ute, etc) as though it’s your own, but the leasing company still owns the vehicle.  So the lender purchases the vehicle or equipment and leases it to you for an agreed term.  At the end of the lease term you either trade in the vehicle, take out another lease on the remaining (residual) value, or pay the residual amount so that you then own the vehicle.

Who uses a lease?

Companies, partnerships, sole traders and individuals can use car and equipment leasing where the vehicle will be used for income producing purposes.  Lease payments are tax deductible as long as the vehicle or equipment is used to produce assessable income.Equipment Lease

Leasing a car can also be used by employees where their employer offers a Novated Lease as part of their employment package and it allows employees to pay for it from their pre-tax income.  I’ll be going into more detail on Novated Leases in a later post.

What are the benefits?

  • A lease can be for between 1 and 5 years, depending what suits your business;
  • Monthly charges are fixed for the term of the lease;
  • The total cost is known upfront so it allows easy budgeting
  • Payments can be made in advance which can help business cash flow or tax deductions;
  • The vehicle is used as security for the lease, so the interest rate payable is lower than if it was an unsecured loan. (An unsecured loan is a cash loan with no asset that the lender can sell if you don’t make the loan repayments, so the lender charges a higher interest rate because it is more risky for them);
  • Tax deductions may be available when the car is used for business purposes;
  • The GST on the car’s purchase price is claimed back by the lender so the price of the car without GST is what the lease is calculated on. This reduces the monthly repayments.
  • If you want to lower the repayments more, a residual amount for payment at the end of the lease term may be included in the lease agreement.

How much are lease repayments?

I’ve included a Leasing Calculator here so you can play around with the purchase price, lease term and residual amount to get an idea of the cost of lease repayments.  At the moment I would suggest you use an interest rate of 6.75% which is on the conservative side.  Leases for equipment tend to be higher so let me know if you want an interest rate to play with an equipment lease and I’ll check the current rates.

Should I use one?

Leases are used for cars and equipment that will be used for business purposes.  If you have a business and want to know if this is the best option for you, you should speak to your accountant. Then enter the details of what you want on my Enquiry Page and we’ll find a great lease that suits your circumstances and goals!

Have you had any experience with an equipment or car lease that you’d like to share?

 

2 Replies to “Car Leasing Explained – What You Need to Know!

  1. Hey,

    Great explanation about the car leases.
    Do you know what happens in case if there is an accident with the car.
    What happens with the insurance. Who are the liable parties?
    I think that it has its pros and cons like anything else in the world I guess.
    For me it is always better to own your own car but it is also true that financial obstacles do exist.

    1. Hi Asen,

      When you lease a car the insurance payments are not generally included in the lease payments (unless it is a Novated Lease offered by your employer). So you need to arrange your insurance just as if you owned the car and let the insurer know that it is a leased vehicle and who the lease arrangement is with. Then if there is an accident, you use your insurance policy just the same as if you owned the car.

      Leasing is not for everyone. It can be a great way for businesses to use vehicles and equipment while just paying a fixed monthly amount. They can budget for the cost of using the vehicle and they don’t have to pay a lump sum to buy it and have their money tied up in an asset that loses value over time. So it makes the vehicles and equipment more tax effective. For individuals, novated leases can be worthwhile as part of a salary package, but they don’t suit everybody either (as I found out by experience!). It’s good to know the options though, so you can make an informed decision.

      Thanks for your comment!

      Rachel

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