Leasing a car is when you agree to make a regular payment for the use of a vehicle. It’s generally used by self-employed people and businesses as there are a number of tax benefits.
It’s important to note the distinction between a car lease and a car loan. While both involve paying installments over time, the purpose of a car loan is to eventually own the car. In a lease agreement, you never own the vehicle, even when the lease has come to the end of its term. That said, many leases have the option to pay a residual (usually a very low amount) in order to own the vehicle once the lease term has concluded.
So if you’re running a business, should you lease a car, get a car loan, or buy one outright?
The answer depends entirely on your objectives and requirements...
Do you want the vehicle to last you a long time, or is it for short-term use? If you want to upgrade to a newer model in a couple of years, then leasing is the way to go.
The option to upgrade is particularly useful if your business means you have to travel a lot.
Verdict for flexibilty: Lease
If you buy a car outright for business purposes, you can immediately write off amounts up to $20,000 as it falls into the business equipment or assets category – as long as your turnover does not exceed $2 million.
If taking out a car loan to buy the car, the purchase amount can be written off immediately. The principal component of repayments are NOT tax deductible, but the interest component IS.
Similarly, if you get a business car loan on a "loan to buy" scheme, the full purchase amount up to $20k can be immediately written off. The principle of your ongoing repayments will not be tax deductible – but the interest component will be.
Lease payments, on the other hand, are fully tax deductible. So for businesses, leasing gives a regular tax deduction that's easier to manage month-to-month.
Verdict for tax: Lease or buy
Fees and interest
Many car lease agreements have break costs so if you do need to get out of the contract for any reason, it can be a costly affair.
With each repayment, you are effectively reducing the total balance outstanding on the lease. At the end of the lease term, you have the option to purchase the vehicle for its residual value, refinance the car, or sell it.
Generally, leasing a vehicle long term is also more expensive than buying outright once all fees and charges are taken into account.
Verdict for fees and interest: Loan or buy outright
OVERALL VERDICT FOR BUSINESS USE: Lease
Need more advice? Call us.
With over a decade of experience, Rapid Finance has built a reputation of matching our clients with the right lender. No matter your situation, we can help you find the most suitable car loan for you.
Call 1300 467 274 to discuss your situation today.