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Leasing a Car: How Does it Work, and What are the Benefits?

It’s time for you to buy a new car – congratulations! There are many different ways to go about securing financing for a car. When you’re weighing up your options, make sure you consider leasing a car. It’s become a popular alternative to spending the money upfront on a car. Instead of paying for your car outright or taking out a car loan, leasing offers flexibility and quality without the purchase commitment. What is it about car leasing that appeals to so many people – and could it be the right choice for you? In this article, we answer the question “How does car leasing work?”, explore the pros and cons of leasing a car and look at how leasing stacks up against taking out a car loan. 

How does a car lease work?

On the surface, car leasing is similar to renting a car. Your lender owns the car, and you lease it from them, paying for the lease via monthly instalments. The lender could be a specialist car financier or a car dealership. These leases usually last two to five years, depending on your lender. 

When the lease ends, you can either re-finance the leftover amount, pay the outstanding amount, or trade that car for a newer model. You don’t necessarily take ownership of the car at the end of the lease period. That can be an option, but it will depend on the type of lease you take out in the first place. 

Leasing a car is very common, and it can be a more cost-effective option if you need to use a car for work. There are three types of car lease agreements available in Australia:

Finance leases

In a finance lease, the car is purchased by a finance company and then rented out over a set lease period. It is an option commonly used by businesses to lease cars to their employees. At the end of the period, you can purchase the car in full from the finance company by paying the residual value, or you can lease the car again for another set period. 

Operating leases

The operating lease is similar to a finance lease, with one significant difference. Once your lease period is up, you are not responsible for the residual payment. The car remains the property of the finance company you leased it from. This option is popular with many businesses, who may want to keep a fleet of cars available for their employees. 

Novated leases

A novated lease is an agreement between your employer, a finance company and you. Here, your employer will make car lease payments on your pre-tax income (also known as salary sacrifice). These contributions also cover maintenance, fuel, and car insurance. This type of lease has solid economic benefits, as it reduces your taxable income and can allow you to make further tax deductions. 

Pros and Cons of Car Leasing

There are several advantages to taking out a lease on your car: 

  • There is no deposit required for most car leases, and many have very flexible contract terms.
  • Costs are calculated in advance, so you’ll know exactly what to pay monthly. This is a great help when budgeting and planning your finances. 
  • Car maintenance and running costs are often included in any novated car leases. The payment also comes from your pre-tax salary, so you can save a fair bit of cash. 
  • There is no obligation to buy the car once the lease ends. You can re-lease the same car or upgrade to a new model, depending on the agreement. This is a great way to drive new cars that you may not be able to afford otherwise.

There are also several disadvantages to consider as well:

  • You don’t own the car. If your need for it suddenly diminishes, you must wait out the lease. Buying the car via a balloon or residual payment is possible, but you need to wait until the end of the lease to do this.
  • When you lease a car, you must ask permission from your employer or lender before modifying the car. 
  • Some leases restrict how many kilometres you can drive over a set period in the car. Depending on what these restrictions are, it may limit how often you can use the car. 

How to Choose the Right Car Lease

You want to weigh up the following options when you’re choosing the right car leasing option for you:

Type of lease: what type will work best for you? A novated, finance or operating lease?

Lease period: work out the best lease period for your circumstances and budget, as this will affect what you pay each month. You can use an online calculator to help you work out what your monthly payments will look like

Lease term: maintenance, fuel, lease payoff coverage – all of these can be possible inclusions to your lease agreement. 

Total mileage: make sure the lease agreement allows enough mileage per year so you’re avoiding excess fees

Tips for negotiating your car lease

It’s essential to do your research before deciding to lease your car. You’ll want to ensure you know all fees and penalties involved in each lease and look for terms that include a safety net for unexpected circumstances, like job loss (especially if you’re leasing through your employer). Think carefully about the costs involved – a low monthly payment can be misleading, so consider what you will pay overall and how much comes out of your pocket each month. 

If you need help visualising what your car lease payment plan may look like, search for a car lease payment calculator. Plugging in some basic details, these calculators can give you a good picture of your financial situation if you take out a lease.

Car leasing vs. Car loans: What is the Better Option for Me?

When you take out a car loan, you are becoming the owner of your car. There are plenty of benefits to owning your car outright—you can modify it as needed, sell it if you need cash, and don’t have any driving restrictions that might come with some car leases. It’s an excellent option for those who will use the car a lot outside of work commitments and want to invest in a quality car that can be used for many years to come.

Car loans are a reliable and popular way to fund the purchase of a new car. They allow you the flexibility to secure the model you need while spreading the cost over regular repayments. 

Leases vs Loans

How does leasing your car measure up against buying it outright with a car loan?

  • Car leasing may be better for those who prefer driving a new car every few years, while car loans are better suited for individuals who want to own their vehicle long-term. 
  • When you purchase your car, you can use it as an asset—this is particularly important if you are considering a mortgage or any other loan opportunities down the track. 
  • Car leasing often involves lower monthly payments than car loans, but there may be restrictions on mileage and wear and tear that can result in additional fees at the end of the lease term. Car loans allow for more flexibility in terms of customisation and ownership of the vehicle.
  • When you purchase your car outright with a car loan, there are no driving limitations. Leased cars can sometimes have very strict kilometre or use restrictions, so if you are someone who wants to use their car outside of work hours, buying may be the better option. 

Choosing a Handy Finance Car Loan

If you love nothing more than taking to the road, purchasing a car might be for you. A car loan from Handy Finance offers you the flexibility to make that a reality, with loans tailored to your financial needs. At Handy Finance, you can easily apply for a car loan online. We offer loans between $2,001 and $75,000, to be repaid over terms of one to seven years – the choice is yours. All our car loans are secured and have a fixed interest rate. Your repayments – whether you choose to make them monthly, fortnightly or weekly – will remain the same over the lifetime of your loan.

Frequently asked questions

What is a car lease?

A car lease is where you pay a leasing company monthly payments for the right to use a car for a specified lease period without owning it. These payments are calculated based on the car’s value, the lease term, expected depreciation, interest rates, and any additional fees.

What is a novated lease?

A novated lease is a three-way agreement between an employee, employer, and leasing company. Leasing a car this way has a few tax benefits, as your employer will remove monthly payments from your salary before tax, decreasing your taxable income. 

What’s included in a lease agreement?

A lease agreement outlines the lease terms, such as duration, mileage limits, lease payments, and responsibilities of both parties.

Is lease payoff coverage important?

Lease payoff coverage or gap insurance provides peace of mind by covering the loan balance if your car is totalled or stolen and the insurance payout is less than the remaining lease obligations.

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

Most lease agreements include an option to buy the car for a predetermined amount at the end of the lease period. This is known as the lease payoff or buyout option.

Secure funds for a new car with Handy Finance

Leasing a car is one of many options available to you if you’re in the market for a new car. If leasing isn’t for you, consider taking out a car loan from Handy Finance. We offer fair and flexible car loan options tailored to your financial situation. Using the Handy Finance Car Loan Calculator, you can explore your loan options and buying power. Get in touch with our credit experts today to explore how our car loans can help you drive off in your dream vehicle.