Acquiring a car, whether for personal use or business purposes, can require significant upfront costs. A finance lease is a flexible financing solution that allows you to obtain the vehicle you need without a large initial outlay. With potential cost savings and tax benefits, finance leases are a practical alternative to traditional loans. Here’s how a finance lease works and why it might be the right choice for you.
A finance lease is a leasing arrangement where a finance company (the lessor) purchases the vehicle you select, and you (the lessee) gain possession and full operational control of it for a fixed lease term. Throughout the term, you make regular payments that cover the vehicle’s cost, interest, and any applicable fees.
Although the lessor retains ownership during the lease period, you are responsible for maintaining and operating the car. At the end of the lease, you may have options to:
- Purchase the vehicle outright for an agreed residual value.
- Renew the lease for a further term.
- Return the vehicle, depending on your needs and the lease terms.
Finance leases are particularly useful for businesses that need long-term access to equipment and want to eventually own it, allowing them to make incremental payments instead of a lump-sum purchase.
Benefits of finance leases
Finance leases offer several key advantages that can make them more appealing than other financing options:
- Potential Cost Savings: Finance leases may provide lower overall costs compared to traditional loans. These savings often arise from tax deductions associated with leasing expenses and depreciation benefits.
- Tax Advantages: Many businesses benefit from the tax-deductible nature of finance lease payments, which can reduce taxable income and lower the overall cost of acquiring the asset.
- Conserving Working Capital: By spreading out the cost of the asset over the lease term, businesses can preserve working capital for other operational needs and investments.
- Access to Newer Equipment: Finance leases enable businesses to access up-to-date equipment and technology without the upfront cost, helping them stay competitive and efficient.
Structure and responsibilities
A finance lease is structured with specific terms that outline the agreement details, including:
- Asset Description: A clear description of the leased asset, such as machinery, vehicles, or technology.
- Lease Term: A fixed duration for the lease, typically ranging from several years depending on the asset’s useful life.
- Payment Schedule: A breakdown of the fixed payments due at regular intervals (e.g., monthly or quarterly) for the duration of the lease.
- End-of-Term Options: Terms outlining whether the lessee can take ownership of the asset, renew the lease, or return the asset to the lessor.
In a finance lease, the lessor’s main responsibility is to provide the financing and retain ownership of the asset until the lease term ends. The lessee, on the other hand, is responsible for making payments, maintaining the asset, and fulfilling any obligations at the lease’s conclusion. It’s essential to carefully review all terms and conditions in the lease agreement to understand the full scope of responsibilities and options available.
Finance lease vs. operating lease
Finance leases are often compared to operating leases, another popular leasing option. The main difference between the two lies in ownership and flexibility:
- Ownership Transfer: In a finance lease, ownership usually transfers to the lessee at the end of the term. In contrast, an operating lease typically does not offer ownership, and the asset is returned to the lessor when the lease ends.
- Flexibility: Operating leases may provide more flexibility in terms of short-term use, upgrades, or early termination options. This can be ideal for businesses that need temporary access to equipment or prefer to avoid long-term ownership responsibilities.
For companies focused on eventual ownership and long-term asset use, a finance lease is generally a more suitable option. However, those prioritising flexibility might consider the benefits of an operating lease.
Finance lease vs. car loan: which option is right for you?
When financing a vehicle, businesses and individuals often compare finance leases with car loans to decide which best fits their needs. Both options provide access to a vehicle, but they differ in structure, payment terms, and end-of-term options. Here’s a breakdown of each option’s pros and cons to help you determine the best choice.
Finance lease
A finance lease is an agreement in which a finance company (the lessor) purchases the vehicle, and you (the lessee) make periodic payments to use it. You’ll have possession and operational control of the vehicle during the lease, and at the end of the lease term, you often have the option to purchase it or upgrade to a newer model.
Pros of a finance lease:
- Lower Upfront Costs: Finance leases generally require minimal upfront payment, making it easier to conserve cash.
- Flexible End-of-Term Options: You may have options to purchase the vehicle, renew the lease, or upgrade to a newer model.
- Tax Benefits: Lease payments are often tax-deductible for business use, providing potential tax savings.
- Conserve Working Capital: By spreading out costs, you free up capital for other expenses or investments.
Cons of a finance lease:
- No Immediate Ownership: With a finance lease, you don’t own the vehicle during the lease term, which can be a downside for those seeking full ownership.
- Possible End-of-Lease Charges: Depending on the condition of the vehicle, there may be charges for excessive wear and tear or mileage overages.
- Potentially Higher Overall Costs: Leasing often results in higher costs in the long run compared to buying, especially if you lease multiple vehicles over time.
- Usage Requirement: You’re only eligible for a finance lease if the vehicle is used for work or business purposes more than 50% of the time.
Car Loan
A car loan allows you to finance the purchase of a vehicle over a set term, with the loan secured against the vehicle. Once the loan is fully repaid, you have full ownership of the car, and there are no restrictions on mileage or usage.
Pros of a car loan:
- Full Ownership: Unlike a lease, a car loan provides full ownership once payments are complete, allowing you to build equity in the vehicle.
- No Mileage Restrictions: Since the car is yours, there are no limitations on mileage or potential penalties for excessive use.
- Flexibility in Use: With ownership, you have complete freedom over how you use and maintain the vehicle.
- Resale Value: You have the freedom to sell or trade the car at any time, potentially recovering part of your investment.
- No Early Exit Fees: At Handy Finance, you can pay off your car loan early without incurring any additional charges, giving you added flexibility and savings.
- Fixed Rates: Fixed rates mean no surprises with your repayments throughout the loan term, allowing you to budget with confidence and peace of mind.
Cons of a car loan:
- Higher Monthly Payments: Monthly payments are typically higher for a car loan than a finance lease, as you’re paying towards full ownership.
- Depreciation: Owning a car means dealing with depreciation, and if you decide to sell, you may not recoup the full purchase price.
- Credit Requirements: A strong credit score is often essential for accessing competitive interest rates and favourable loan terms.
Ready to take the next step?
If you’re leaning towards ownership and the financial freedom that comes with it, a car loan can be a suitable solution. With a Handy Finance car loan, you benefit from competitive interest rates, flexible repayment options, and clear terms tailored to your unique financial situation. Whether you’re looking to buy a new vehicle or a used one, our team is dedicated to making the financing process as smooth and straightforward as possible. Plus, with fast pre-approvals and a supportive credit team, you’ll have the confidence to negotiate a better deal on your vehicle.
Alternatively, if you’re considering a finance lease, keep in mind that eligibility typically requires using the vehicle for work or business purposes more than 50% of the time. Finance leases can offer advantages like fixed payments, tax benefits, and end-of-term flexibility for business-use vehicles.
Start your journey towards car ownership with Handy Finance today—let us help you drive away in the car you’ve been dreaming of, backed by a financing solution that’s built for you.
Approvals are subject to Handy Finance’s credit criteria and responsible lending requirements. Fees, charges, terms and conditions apply. Finance provided to approved applicants by OurMoneyMarket Lending Pty Ltd ABN 64 605 231 669, trading as ‘Handy Finance’ holds Australian Credit Licence number 488228 and is a member of the Australian Financial Complaints Authority (AFCA). The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, we recommend that you consider whether it is appropriate for your circumstances. We recommend you obtain independent advice before acting on any information in this article.
