Getting a lease for a business vehicle can be a great decision if you’re only wanting to use the vehicle for a short period of time or if you’re not in a financial position to purchase a car or take out a loan. We’ll break down the pros and cons of getting a business vehicle lease so you can decide if it’s the right choice for you.
What is a business car lease?
If buying a business vehicle isn’t a financially viable option, but you still would like to use a car for commercial purposes for a certain period of time, a car lease might be a great option for you! There are three main types of leases that you can obtain:
With a finance lease, the risk of ownership is transferred to the lessee, but the actual legal ownership is not transferred. The lessee normally will have the option to purchase the business vehicle at the end of the loan term. Finance leases tend to be best suited for businesses looking for a shorter-term lease.
An operating lease is another popular type of rental agreement, but with this lease, there will not be an opportunity to purchase the car at the end of the loan term. Operating leases are normally more appropriate for customers looking for a long-term lease.
A novated lease is an employee-benefit arrangement that involves your business, your employee and a lender. These agreements normally last between one and five years. It works as a type of ‘salary packaging’, where vehicles can be financed by repayment obligations made from an employee’s pre-tax salary. This can help to reduce your taxable income, and assist with combining your vehicle’s expenses into a single payment.
Pros of car leasing
Easily upgrade your vehicle
Because you’re not tied to any asset, you’ll be able to easily upgrade your vehicle at the end of the lease, if that’s something you’d like to do. If having the latest model of car or the most up to date technology is something that’s important to you, then a business lease could be a really great option.
You’re not responsible for maintenance
Because you don’t own the asset, and you won’t end up owning it, you’re also not responsible for any maintenance or servicing that the car might need. In most cases, the company you’re leasing the car from will be responsible for paying the costs of maintenance and servicing.This means you can save some money on maintenance costs, and maybe use that money in other areas of your business.
Cheaper monthly payments than a loan
Finally, entering into any kind of lease agreement will be cheaper than taking out a loan, because you’re paying to use the vehicle for a set amount of time, and you won’t end up with ownership over it.
Cons of car leasing
You won’t ever own the asset
If your dream is to eventually own your business vehicle, a lease agreement may not be a great option. With a lease agreement, you’re paying to use the car for a certain period of time and you’ll need to return the car at the end of the lease period, so you won’t eventually own the car.
Increased insurance cost
You’ll probably end up paying a higher insurance cost with a lease agreement compared with a commercial loan. While this may seem like a smaller cost, it’s important to keep it in mind, as the small costs can add up over time.
Restrictions on use
Though this isn’t applicable to every commercial car lease agreement, in many cases you might find that lease agreements have restrictions on things like the amount of use, normally calculated by restrictions on mileage. If you’re wanting to use the vehicle for long distance trips, make sure you check that your lease doesn’t have restrictions on this.
What other options are there?
If a business vehicle lease doesn’t sound like the perfect option for you, there are other finance options available, including a hire purchase or chattel mortgage.
A hire purchase is a great option if you’re looking to buy a business vehicle, but don’t have the cash on hand to do so immediately. With a hire purchase, you’ll normally make an initial deposit payment and then pay off the remaining balance of the car loan in regular instalments. These repayments are normally monthly, but some lenders can give you the option to make weekly or fortnightly payments instead. At the end of the loan period, you’ll then gain complete ownership over the vehicle.
A chattel mortgage has a very similar loan structure to a traditional fixed-rate mortgage. Typically, the lender will use your car as security against the loan. This means that if you’re unable to meet your monthly repayments, your finance provider might repossess your vehicle in order to recover their funds. Unlike with a car lease, you’ll have ownership over the car straight away, and you’ll pay back the loan with the income generated by the asset in your business.
Factors to consider
Whether you’re looking at leasing a car or taking out a loan in order to use a business vehicle, there are a number of factors you should consider that may assist in the decision making process.
- Frequency of use. How long are you planning on using the car for? If you’re only going to need the vehicle for a short period of time, or you’re interested in frequently upgrading, a lease would probably be best suited to your needs.
- Be aware of any restrictions. Some leases have restrictions on things like mileage, so if you’re planning on driving long distances, make sure you take this into consideration.
- Fees and charges. It’s important to consider any fees and charges that you may incur with either a car lease or a car loan, and carefully factor these into your budgeting. These fees can vary greatly between lenders, so make sure you account for these. When you receive your personalised quotes, we’ll include all the lender fees and charges so the amount you see is exactly what you’d end up paying.
- Tax effectiveness. If you’re buying the car for a commercial purpose, the tax effectiveness of your purchase will probably be an important factor to consider. Leased assets are typically seen as an operating cost and are often tax-deductible. Hire purchase assets, on the other hand, are viewed as an asset on your balance sheet, and are therefore eligible for the instant asset write-off scheme (this is because hire purchases are treated in the same way as an outright sale within a tax period). If tax effectiveness is a key consideration for you, we recommend speaking to your account to find out which decision works best for you.
- Overall costs. Whether you’re getting a car lease or loan, it’s important to consider the overall cost. Monthly repayments for a loan like a hire purchase tend to be higher than for leases, because with a loan you’re paying to eventually own the asset. However, with something like a hire purchase agreement, you’re able to claim depreciation costs. Further, you’ll be eligible for the instant asset write-off scheme because you’ve presumed ownership over the vehicle.
- The future of your business. Finally, it’s imperative that you consult your business plan and think about the future of your business before making any decision. Think about how long you’re going to need the vehicle for, what you need to operate in the short-term and what will be necessary to grow your business in the future. Getting a car for business purposes is a very exciting decision, and it can also be a crucial one.
Getting a lease for a business car can be a great option for many people, but it’s important to weigh up the pros and cons of it before making any decisions. Understanding exactly what each type of lease and loan option entails is crucial to making a well-informed decision. If you decide that instead of a car lease you’d rather take out a business car loan, Driva can help!
To get started, just tell us a few details about you and the car you’re looking to buy, and our smart financing platform will give you your personalised rates in less than a minute, and all without impacting your credit score.
If you’ve got any questions about the car loan process, or what type of loan product is best for your business, feel free to get in touch with our team of commercial vehicle finance experts. Whether you’re a small business or an established one, we’re here to help - give us a call on 1300 755 494 or email us at email@example.com.