How does car leasing work and should you do it?

Leasing a new car is becoming increasingly common and is an effective way to get into a car - but it’s not for everyone

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How does leasing a car work?

Thanks in part to the increasing prices of new cars across the Australian market, leasing a new car has become a popular alternative to buying a car outright.

In particular, novated leases are an attractive option for employees wanting to cut down their taxable income while getting a new car at the same time.


What is a novated car lease?

In simple terms, a novated lease allows an employee to pay for a vehicle's finance with their pre-tax salary, receiving the use of a brand-new car over an agreed number of years.

Generally, they also come with the convenience of a monthly payment that includes not only the lease on the car, but also the registration, insurance, fuel, and maintenance.

The tax deductions available can make leasing a car an attractive option to the self-employed and some employees.

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What is leasing a car?

Rather than saving up the purchase price or borrowing money to buy a car, a lease is a contract under which you pay for the use of the car.

As noted above, a car lease may be compelling because it can include running costs like servicing and insurance. You pay a monthly amount and let the lease company take care of it.

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Can I keep the car at the end of the lease?

Generally, no – that's why it's a lease and not a loan, much like renting a home rather than using a mortgage to buy it. However, there are options!

Usually, when the term of the lease is over, you hand the car back – but it's possible under some types of leases to buy the car at the end of the term.

This means that the monthly payments you made in addition to the final balloon payment will likely exceed the as-new value of the car.

Alternatively, you can opt back into another lease with a brand new car and start the cycle again.

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What is a final balloon payment?

The 'balloon payment' is a term that refers to a novated lease's residual value, also known as a final lump-sum payment. This is the payment required at the end of a novated lease term if you wish to keep the car.

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Tax Breaks for novated leases

If you own a business or are an employee planning to buy your next car under a salary sacrifice agreement, it’s important to have the right kind of lease or finance to make the most of your deductions.

For an employee, a novated lease lets you make monthly repayments and running costs come out of your pre-tax salary, reducing your taxable income.

Business owners are better served with 'hire purchase' finance or a chattel mortgage, which allows you to claim back the GST upfront.

Although the tax deductions available in some situations can reduce the cost of owning and operating a vehicle, there’s no escaping the fact that the remainder comes out of your pocket.

It pays to seek personal financial advice and to do your sums before you jump in and sign on the line.

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Novated leases: Three things to remember

  • A salary sacrifice arrangement can save you a lot, especially for those in higher tax brackets
  • Not all leases give operators the option to buy the car outright at the end of the term
  • Novated leases allow you to pay one monthly payment for a new car, while also taking care of running costs

Is leasing a car worth it?

Before you start toward the car dealership, there are a few factors that depend entirely on your circumstance.

For a novated lease, your employer must first make the option available, which they'll usually arrange by partnering with a novated leasing business. Only then can you take advantage of having your work pay for your car out of your pre-tax salary.

Having a new car every few years seems like fun, but you'll likely be paying more for the same thing – especially if servicing and maintenance is included, but then it's up to you to decide if the convenience of one monthly payment outweighs having to manage all of those details and costs yourself.

Again, if you're in a marginal higher-tax bracket, it's another way you can reduce your income at tax time. See a financial advisor or a leasing consultant to find out if leasing will work for you.

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WhichCar Staff


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