One of the biggest questions people ask when they need a car is the one that involves car leasing vs buying. People also ask, what is car leasing? What are the pros and cons of leasing a car? And how does car leasing differ from a car loan? You may not be aware of it, but Australians bought cars in 2023 like never before. Over 1 million cars were sold between January and October of the previous year. With so many new cars being purchased, it’s no wonder that there’s a marked interest in the various car finance arrangements available.
Novated Lease Vs Car Loan
Let’s get one confusing thing out of the way first before we delve deeper into this subject, and that’s the confusion behind a novated car lease. When it comes to novated lease vs car loan, many assume they’re the same thing (or at least very similar). However, leasing a car is more like renting a house – you pay for the privilege of using it but you do not own it and you cannot sell it.
In contrast, a car loan is like taking out a mortgage to buy a house. You borrow the necessary funds from a lender and the title is transferred into your name.
Leasing A Car Vs Buying – Your Options
There are a lot of options available to you when it comes to car financing. The most common car finance agreements are:
- Novated Lease
One of the most common options for car leasing, this agreement is taken up by a finance company, an employer, and an employee. The employer pays for the lease from their employees’ pre-tax salary. Once the lease term is completed the employee can either extend the lease, pay a ‘residual value’ balloon and keep the car, or trade-in the car and sign up for a new novated lease.
- Car Loan
This is a personal loan that is specifically for buying a car. The loan is secured against the purchased vehicle and will usually have a term of between 1 and 7 years. Once the loan is paid in full, you will own the car outright.
- Chattel Mortgage
This is a loan that a business will secure to buy a work vehicle or piece of equipment (also sometimes known as an ‘equipment loan’). Like a personal car loan, the vehicle will serve as security for the loan until it is paid back in full.
When considering a novated lease vs car loan, it’s important to weigh up the various pros and cons.
Pros and Cons of Car Leasing
When comparing a novated lease vs car loan, there are some definite benefits to car leasing, including:
- Cheaper monthly repayments.
- Access to the latest model cars.
- Simplified maintenance (since many novated leases come with a maintenance package).
- Potential tax benefits (due to the pre-tax salary sacrifice).
However, a novated lease also comes with significant drawbacks:
- You don’t own the car, so you can’t sell it.
- You can’t make any modifications.
- You may face restrictions on how far you can drive the car (similar to a hire car).
- If you lose your job during the lease, you’ll also lose all tax benefits.
- Overall, you’re likely paying a lot more. If you repeatedly take out novated leases then you’re continually paying for the car’s depreciation (cars typically lose 60% of their value in the first few years).
When comparing a novated lease vs car loan, there are some definite benefits to car leasing, including:
- GST Savings on the purchase price
- No requirement for a deposit
- Running costs are all included in the one payment
- Tax Savings
However, a novated lease also comes with significant drawbacks:
- No ability to reduce the finance expense by paying a deposit
- You must have a balloon at the end of the lease term
- Maximum 5-year lease term
- It’s difficult to change employers
- No real choice of finance provider
- Hidden fees and charges
- Restrictions on how much you can drive the car
- Expensive to exit the lease early.
Pros and Cons of a Car Loan
When you take out a car loan you receive the following benefits:
- You own the car from the very beginning.
- You can make modifications to the car.
- You can drive the car wherever you want.
- You can sell the car.
- You can compare the numerous car loans available, ensuring a competitive loan that suits you.
- Flexible loan terms (including deposit, loan length and deposit)
There are potential downsides to a car loan, but these are not as serious as the downsides of car leasing:
- You will be responsible for ongoing maintenance.
- Possibility of slightly higher monthly payments
- Possibility of higher down payment
A Car Finance Broker Can Help You Compare Car Leasing vs Buying
How do you decide if you’re better off leasing a car vs buying? The best thing to do is talk to an experienced car finance broker. At Muscle Money, we’re committed to working in the best interests of our customers. That means we’ll do a complete assessment of your circumstances and provide expert advice on the pros and cons of car leasing vs a car loan.
With a wide panel of lenders and the capacity to negotiate on your behalf, Muscle Money will ensure you get the best deal to suit your needs.
Ready to buy a car? Contact Muscle Money for a free appointment.
Caleb Waye-Harris, Senior Manager of Asset Finance at Muscle Money, has almost 15 years of relevant experience in the finance industry. His extensive background includes project management, consumer and commercial lending and asset-based lending.
