The Pros And Cons Of A Car Lease
When deciding whether to lease or purchase a car for your business, there are several factors your business should consider. Leasing may be a good option for those who want to drive a new car every few years or for a business with limited cash flow and budget.
A commercial car lease is usually for a 2 - 4 years period and at the end of the contract, depending on the type of agreement, the vehicle may be purchased for a residual value. The parties can renegotiate a new contract for a later model vehicle, or the car can be handed back.
Here is a brief summary of the different types of leases available:
A novated lease can be a cost-effective way for an employee to buy a new or used car. In general terms, the employee is responsible for paying the full lease and guaranteeing the full residual payment at the end of the contract period.
As the employer, you will deduct payments from the employee’s pre-tax income, as a salary sacrifice, and pay the lease on their behalf; effectively reducing the employee's taxable income. More information on novated leases and GST information is available on the ATO's website.
A finance lease means the lessor (owner of the vehicle) retains ownership of the vehicle until the end of the contracted period, when the period is up, the lessee pays an agreed balloon payment and ownership of the vehicle is then transferred to the lessee.
An operating lease means the lessor retains ownership of the vehicle and at the end of the agreement, the lessee returns the vehicle and can renegotiate a new contract.
Before your business signs a car lease, you should consider the pros and cons of this type of arrangement to make sure it meets the needs of your business. So, let's discuss some of the advantages and disadvantages in more detail:
Some of the benefits of a car lease include:
1. Lower monthly payments than if you were to purchase the same vehicle outright
One of the biggest advantages of leasing a car is that the monthly payments are usually lower than if you were to purchase the same vehicle outright. This is because you are only paying for the portion of the car's value that you use during the length of the lease. For example, if you lease a car for three years, you are only paying for the value of the car during those three years, rather than the full value of the car.
This can make leasing a more affordable option for businesses, especially those just starting out with limited cash flow or trading history who may not meet the lender's criteria for a traditional car loan.
2. The ability to drive a new car every few years
Another advantage of leasing rather than buying a vehicle is having the opportunity to drive a new car every few years and your business won't have money tied up in a depreciating asset. At the end of the contract term, you can simply return the car and lease a new one. This can be a great option as you won't need to worry about an ageing fleet and the increased running costs that occur as a vehicle ages.
3. No need to worry about upfront capital or selling your old vehicle when you want to upgrade
When leasing a vehicle, you don't need to worry about an upfront capital investment which is required for outright purchase or a deposit to secure a chattel mortgage. You will know your monthly repayment for the term of the agreement, and you don't have the hassle of selling or trading in your old car when you want a new one. At the end of your lease, simply return the car to the dealership.
Some of the drawbacks of a car lease include:
1. Higher overall cost than taking out a chattel mortgage or secured car loan
One of the drawbacks of leasing a vehicle is that the overall costs can be higher than taking out a chattel mortgage. You should also consider that as you are entering into a fixed-term contract, even if you no longer need the vehicle, you will need to continue to make repayments or pay an early termination fee. Unlike a chattel mortgage or car loan, you do not have ownership of the vehicle so are unable to sell it to clear the remaining finance.
Also, if you are required to pay a balloon payment or 'residual' value payment at the end of the lease period, the cost of the vehicle can prove to be far more expensive than if you had purchased it upfront.
TIP: Rather than using the business's capital to cover the balloon payment, you can borrow the amount through a chattel mortgage. Talk with us at Finance Brokers Victoria to see if this is an option.
2. If the car's resale value at the end of the lease is less than the estimated 'residual value' at the start of your lease, you may have to cover the difference.
The residual value will be provided in the lease agreement and is the anticipated value of the vehicle at the end of the lease period. This residual value will determine your monthly repayments and the cost to purchase the vehicle at the end of the lease term.
The resale value refers to the current market price to purchase the vehicle based on depreciation, mileage, and condition of the vehicle.
TIP: Consider a car make and model with good resale value as you may be required to pay the difference between these two values at the end of the leasing period.
3. Restrictions on mileage and modifications that can be made to the vehicle
Another drawback is you might be restricted on mileage and the modifications that can be made to the vehicle. This is because the lessor wants to ensure that the car is returned in good condition at the end of the lease, so they can get the best available resale value and keep as close to the residual amount as possible.
Your contract may include several conditions including:
A limit on the number of kilometres you can travel. If you travel over the agreed allowance, you may be required to pay a monetary amount per kilometre.
Ensuring the vehicle is returned in good condition. If you don't, you may be required to pay damages or even face legal penalties.
Considering a car lease in Victoria?
While leasing a vehicle can be a great option for many businesses, there are some definite drawbacks and that is why we recommend speaking with one of our Finance Brokers who specialise in equipment finance to discuss if leasing is the best option to get your business moving. This article was originally posted on: The Pros And Cons Of A Car Lease