Car lease vs car loan: What’s the difference?

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When it comes time to finance a new car, is it better to get a car loan or go for something like a novated lease? Here are the advantages and disadvantages for you to consider.

A popular form of buying a new vehicle is to get a car loan, although there are other ways to get into a brand-new car beyond traditional finance. An increasing number of buyers are now turning to leasing, otherwise known as a novated lease if you are an employee. The question is, should you buy or lease your next car?

A car leasing deal is structured in a familiar way to car finance. You will sign a contract that will usually require you to make an upfront deposit payment followed by fixed monthly payments across the term of the contract. At the end of the lease term, the vehicle will be returned, where it will usually be sold on to someone else. You might also have the option to buy out the vehicle if you do not wish to continue with a new lease or simply like the car.

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A novated lease is a residual-value product. You borrow the cost of a car’s estimated depreciation over an agreed term. The difference between the car’s current value and residual value at the end is used to calculate the monthly payments. What’s left at the end, the residual value, is what would need to be paid out to own the vehicle.

What are the advantages of leasing a car?

A key advantage of leasing a car is that the monthly payments tend to be lower compared to those for other forms of finance. This is because you’re effectively renting the car from the lender for the duration of the deal. Unlike purchasing with finance, you’re not building up any equity in the car in order to take ownership of it at the end of the deal. To get an idea of the costs you might want to look at current car leasing deals.

All kinds of costs can be built into the leasing deal as well. There’s the usual routine maintenance which must be done on time, but everything from tyres, roadside assistance, comprehensive insurance, fuel cards (or EV charging cards for electric cars) plus CTP can be included, so it’s worth making sure you are getting everything you want in the one monthly payment.

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There are also tax benefits to novated leasing for both employees and employers which we detail in this comprehensive car leasing guide.

Leasing can also be arranged over a variety of different time frames. Agreements typically last for two or three years as you would expect with other kinds of car finance, but can be anywhere from one to five years in duration.

Car leasing is not restricted to only new cars either. Cars that are no older than around 10 years at the end of the contract can usually be leased, as well as some vintage or classic cars, as long as they hold value according to the leasing company.

In short, car leasing is a great option if you like to swap your car every 2-3 years for a new one. If you like the sound of minimal maintenance costs, lower monthly payments than typical finance options, and don’t mind never actually owning the car outright, then leasing could be for you.

What are the disadvantages of leasing a car?

There are drawbacks to car leasing, however. Building equity is a key advantage that traditional car finance has. You won’t be able to make use of any potential equity with a novated lease deal when it comes to the end of the agreement.

Because you don’t build any equity with a lease deal, if you end up having paid off more than the car has depreciated over the course of the contract, that money is gone – no ifs, no buts. It just means more profit for the lender when selling the car to a new owner.

As we’ve already established, you’ll never actually own the car outright with a leasing deal but that doesn’t mean you don’t have to look after it. You can incur charges when you hand back your leased vehicle if you have exceeded the mileage limit on the contract or if it is in poor condition. It’s always worth reading the small print of any finance agreement carefully and checking for potential fees and charges before you sign. You can read more on the basics of what to expect when you sign up for a car leasing deal.

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You can lease used cars but the majority of leasing agreements are on brand-new vehicles with a full manufacturer’s warranty. It’s important for anyone leasing a used car or seeking to extend a lease deal with their lender to be aware of when the warranty expires. Once there’s no manufacturer’s warranty on a car, it’s much more likely that you could be landed with bills if things go wrong.

In summary, if you like owning your car outright, novated leasing may not be for you, although there can be the option to purchase at the end of the contract. If you prefer to keep your cars for a long time or worry about mileage limits, it’s probably best to avoid leasing a car and choose a finance deal that better suits your needs.

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Further Reading

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