If you're in the market for a new vehicle, you may come across the term "finance lease". But what is a finance lease? Simply put, it's a type of leasing agreement where the lessee (the person who leased the vehicle) is responsible for making payments, usually over a set period of time. At the end of the lease, they have the option to purchase the vehicle or return it to the lessor (the person leasing the vehicle) without any further obligation.
If you are trying to weigh up the pros and cons of a finance lease versus a traditional loan or some other financing option, there are a few things to consider. In this overview, we'll explain how finance leases work, their advantages and disadvantages, and some tips for getting the best deal on a finance lease.
What is a financial lease and how do they work?
Car leasing is a comprehensive form of vehicle financing that allows entrepreneurs, employees, or self-employed individuals to enjoy the benefits of having a car without shouldering full ownership. Instead, they can rent it from another company (in this instance the finance firm) and pay for it using monthly instalments. To explain in simpler terms - when you opt for finance lease agreements, someone else owns the car while you only pay them regularly to use it as if it's your own!
What are the advantages of a finance lease?
A finance lease is an excellent way to obtain a new car without having to make a large upfront payment. Instead, the payments are spread over an agreed period of time and made in smaller instalments - typically monthly - with the total cost of the lease including both interest and maintenance costs.
The lower monthly payments also allow you to free up more of your capital for other investments. And the tax benefits offered by leasing can help you to lower your tax liability. Furthermore, the finance company is responsible for any repairs and maintenance costs related to the car, so you don't have to worry about unexpected bills. This makes it a great option for business owners looking to keep their financing cash flow in check.
What are the disadvantages of a finance lease?
The main drawback of a finance lease is that you don't actually own the vehicle. At the end of your lease period, the car must be returned to the leasing company unless you decide to purchase it outright.
Another disadvantage is that you are likely to pay more in total than if you had purchased the car outright with a loan. The finance leasing company will typically charge an interest rate and include other fees like maintenance costs, which will add up over the term of your lease.
Additionally, there are often penalties for early termination and if you exceed the agreed number of kilometres per year, you may be subject to an excess charge. Lastly, finance leases typically have higher interest rates than traditional loans.
Who is eligible for a finance lease?
If you use a vehicle for work or business purposes more than 50% of the time, you could be eligible for a finance lease. You may be required to meet additional criteria such as having a minimum level of income, having a good credit score, or owning other assets that can be used as collateral. Australian companies, partnerships, sole traders and anyone who is looking to use a car to generate income are suitable candidates for a finance lease. Additionally, employees keen to make use of a novated lease as part of their salary package should investigate this option as well. It all depends on your individual requirements.
How does a finance lease compare to other types of leases?
A finance lease is a type of lease that involves the lessee (buyer) having full responsibility over the leased asset, as opposed to operating leases where the owner (lessor) still legally owns and maintains control of the asset. On a finance lease, the lessee makes fixed payments— going toward both regular interest and repayments on the assets—while also shouldering all risks related to repair, maintenance, insurance, taxes, and any other costs associated with owning a certain asset.
Let's look at the different leasing options compared to a finance lease:
- A hire purchase: Hire purchase is a type of loan that requires the borrower to make regular payments for an agreed term, which can be either monthly, weekly or fortnightly depending on the lender. At the end of your term you will have ownership of the asset.
- A chattel mortgage: A chattel mortgage is a secured loan that involves borrowing money to purchase an asset and using the asset as collateral. You will be required to make regular payments during the term of the loan and once you have paid off all your instalments, the title of the asset will be transferred to you.
- A Novated Lease: A Novated Lease is a salary packaging option that enables an employee to lease a vehicle and have the payments deducted from their pre-tax salary. This arrangement is often used by employees who want to reduce their taxable income.
Tips for getting the best deal on a finance lease
When it comes to finance leases, it's important to do your research. Make sure you compare different offers and look for a reputable lender with favourable terms. Consider the interest rate, repayment terms and conditions, fees and charges, and any additional features that may be included in your lease agreement.
It's also a good idea to check your credit score before you apply for a finance lease. This will help you determine if you are likely to be approved for the lease and gives you an indication of what kind of interest rate you can expect.
Finally, make sure to read the fine print of any finance lease agreement you are considering. It's important to understand the full terms and conditions so that you can make an informed decision about whether the lease is right for you.
By researching your finance lease and shopping around, you should be able to find a great deal and make the most of your investment.
Things to consider
When it comes to leasing vehicles, many people simply do not know what their options are at the end of the agreement. Fortunately, there are a few common paths available and they depend largely on the type of agreement that was set forth in the beginning. At the conclusion of a lease term, the lessee often has two options: to purchase the car for its fair market value or return it to the lessor. Ultimately, this decision should be based on their current financial situation and whether or not they intend to keep the vehicle in question after its initial lease. If you think you may be approaching your lease's end, consider these two options and decide from there what will work best for you.
Once you’ve decided that a finance lease is the best option for your needs, the next step is to find a lender who offers this product. With Driva, we check your profile against thousands of lender policies to find your perfect commercial loan option. This means no negative hits on your credit score and a smooth process from start to finish.
Let Driva unlock the perfect finance rate for your business within minutes! We will compare over 30 lenders to help you get the lowest rate and most affordable terms that meet your business needs. With Driva, you can find the right loan for your business and drive away in a new car with confidence.
How do I apply for a finance lease?
Applying for a finance lease is quite straightforward. You will first need to contact a lender or a loan platform like Driva and provide your financial and personal information. This includes the type of asset you’re looking to purchase, the terms desired for the loan, and a few other details.
How is a finance lease taxed?
Generally speaking, lease payments made under a finance lease will be deductible against your taxable income.
How can I terminate a finance lease?
It is possible to terminate a finance lease early, although it will typically involve paying an exit fee. The exact terms and conditions of your contract will determine how you can terminate the lease early. It is important to read and understand the terms of your agreement before signing on the dotted line.
Is a finance lease a good option?
Whether a finance lease is the right option for you or not depends on your individual circumstances. It's important to do your research and consider all of the factors involved, such as the interest rate, repayment terms and conditions, fees and charges, and any additional features that may be included in your lease agreement. By researching your finance lease and shopping around, you should be able to find a great deal and make the most of your investment.
What happens at the end of a finance lease?
At the conclusion of a finance lease, the lessee typically has two options: to purchase the car or return it to the lessor. The best option for you will depend on your current financial situation and whether or not you intend to keep the vehicle. Consider your options carefully and decide what will work best for you.