Recently a number of colleagues have entered into lease agreements for cars. Basically, leasing a car involves making monthly payments for the term of the lease. According to the paperwork that you sign before you enter into one, the payments are a combination of an amount for petrol, servicing, tyres and the lease itself. When it’s salary sacrificed, the payment comes out of your pay before tax and therefore carries some tax advantages. Because of the tax advantages, these things are easy for the lease companies to sell, and you may find that you have a colleague who tells you how good their lease has been and encourages you to get one too.

Now for the bad points. When you lease a car you don’t own it. You have the option of buying it for a pre-determined sum at the end of the lease, but if you choose not to take that up you have no transport. When you look into it you may find the arrangement includes a $300 annual fee, over a grand’s worth of insurance in case you lose your job, and an interest component connected to the lease itself. And you need to purchase the vehicle from a dealership.

Depending on your marginal tax rate (and if you can salary sacrifice the payments) these leases may work for you. However, I would always argue that you’d be better off buying a car outright after saving up the funds. Even if it means that you purchase second hand and privately (i.e. not from a dealer who will add several thousand to the price). If your mortgage is an offset account and you draw down on your savings to purchase the car, then increase your mortgage repayments by the amount you would otherwise be paying in lease payments and you will be better off. The interest rate on the mortgage would be lower than that attached to the lease, and the discipline of extra mortgage repayments would make paying your mortgage off in a short time easier.

If you are considering a lease for a vehicle, before you sign up get someone who is independent of the deal to check it out for you. See an accountant and pay them a couple of bucks before you sign up for a five year lease that would potentially see you worse off. Even if your workmate is adamant that leasing is great, unless that colleague is an accountant independent of the deal, check it out.




On a completely separate note, our blog received a review on the website of creditcard.com.au this week. We were pleasantly surprised to learn that someone actually reads this stuff! And hey, getting a mention as a favourite blog in the same breath as David Koch’s is pretty cool. Not sure about the pants I’m portrayed wearing in the cartoon though…

One Response to “Leasing”

  1. Shayne says:

    Leasing Sux. We recently leased a vehicle. We had a 30% residual but none of the other stuff was built in. Tax wise it worked out quite well for me, I would receive a chq each year of $8000 as I wrote 86% of it off AFTER TAX (I didnt salary sacrifice the vehicle as I didnt want to do FBT etc) However making those repayments every month really sucked. We ended up paying more off ever month toward the end to pay off the residual and have sold the car on.

    I think doing a Commercial Hire Purchase or personal car loan at a competitive rate is the way to go. (if you dont have a mortgage) and paying an extra $20/week to knock more off it. Better still go 2nd hand. The only problem with 2nd hand it can be a false economy with repairs etc. Be careful with what brand you buy.

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