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02.12.2008Buy or lease a car?

So you've opted to get a new car. The question is should you buy it or lease it?


By Sam Walker

So you’ve opted to get a new car. The question is should you buy it or lease it?

There’s no cut and dried answer. The path you take depends on the car’s purpose, your financial circumstances, whether it’s included in a salary sacrifice package and ultimately the arrangement you feel most comfortable with.

There are a variety of lease and loan options available from tagging it on to the home loan to getting a novated lease. It is advisable to do your homework and discuss your options with an accountant before making a decision.

In short if you pay cash or get a loan, you own the vehicle and it is yours to do what you like with. If you get a lease you don’t own the vehicle – you’re essentially renting it from the finance company.

At the end of a lease you are often able to upgrade your vehicle under a new lease agreement.

In most circumstances there are no tax advantages for wage earners. The exception is the novated lease, which is usually part of a salary sacrifice package and sometimes prevents bracket creep.

With a novated lease the employer takes out the lease and you make payments from your pre-tax wages to your employer. There can be fringe benefit implications.

You must get credit approval to be eligible for a novated lease. When you cease working for that employer you take responsibility for the lease or transfer it to a new employer.

There are tax concessions for business people, whether they buy or lease a car, providing the vehicle is used for at least 50 per cent business purposes. If you buy a car outright you can claim depreciation over a few years.

With a finance lease the residual amount (the balance owed on the car) is your responsibility whether you take ownership, which is often an option, or return the car to the lender. Finance leases are recorded on a business’ balance sheet.

An operating lease is like a long-term car rental where financial liability usually rests with the lender. At the end of the lease you return the car and the finance company retains ownership. GST is claimable on the monthly lease payments.

Peter Stocker from SPC Finance and Leasing says many business people are opting for a chattel mortgage instead of a lease agreement because they are able to pay the GST in one lump sum when they buy the car and claim it back in their next tax statement. Depreciation and interest payments can also be claimed for tax.

A chattel mortgage is basically a hire purchase type of loan where you own the car but the finance company owns the title to the vehicle until you have paid it off.

There is often also flexibility to vary payment plans to suit your circumstances, such as a seasonal income. Leasing rates are usually .25 to .5 per cent cheaper than loan rates.

With any agreement you enter into it is advisable to read the fine print and understand the terms and conditions.

Some lease arrangements require you to choose the number of kilometres you do and there can be penalties for variations. There can also be fees and penalties for breaking a lease and the finance company will expect the vehicle to be in “good condition” at the end of the lease. You may have to pay extra if it isn’t.

You need a good credit rating to get a lease and Stocker says if you have been overseas for an extended period, unemployed for a length of time or you are starting a new business you are not likely to be approved for a lease.






 





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