Many of us have heard the saying that ‘rent money is dead money’; but does this translate to car leasing? There are pros and cons to both leasing and buying a car and, in the end, your decision should be based on your personal situation and driving needs.

What is a car lease?

A car lease is like renting a car for a long period of time (normally two to five years), then at the end of the lease, you decide whether to buy it or switch to another vehicle.

Car leasing can give people the option of upgrading their vehicle every few years, without having to sell or trade in the car.

Like most borrowing systems, leasing a car is subject to a credit check and application criteria, including income and employment history; it may also be subject to mileage caps – which are limits on how far you can travel in the car over a period of time.

There are three types of car leasing in Australia: one for workers on a salary and the other two for businesses.

• In a novated lease, the employer agrees to make lease payments on behalf of the employee from the employee’s gross income, known as salary sacrifice. The car can be for personal use and, at the end of the lease period, the employee has the option to renew or extend the lease, upgrade to a newer model, or purchase the vehicle at its residual value.
• In a finance lease, an investor buys the vehicle and leases it out to a business to use for business purposes – for at least half the time. At the end of the lease period, the business must either renew the car lease or purchase the car at its residual value.
• An operating lease is similar to a finance lease except that, at the end of the lease period, the vehicle is simply handed back to the finance company.

Let’s now look at some pros and cons of leasing vs buying a car.

• Compared to a car loan, leasing doesn’t require a deposit and the monthly payments may be cheaper than repaying a loan. It may also be easier to be approved for a car lease rather than a car loan. However, in the long run, taking consecutive leases (e.g. over 10 years) may be more expensive than buying a car.
• Leasing a car can sometimes generate tax savings it if reduces the employee’s taxable income (see novated lease above). Nevertheless, the employer may have to pay Fringe Benefits Tax (FBT). In some cases, the employer reduces the employee’s salary to cover this cost. Moreover, moving jobs would require another agreement with the new employer.
• Unlike owning a car, leasing allows you to upgrade to a new model every few years, without having to sell or trade in your car before upgrading. However, since you don’t own the car you’re leasing, you cannot claim it as an asset for financial purposes nor can you make changes to it.
• Many leases have mileage caps and exceeding them may attract penalties, and so would terminating a lease contract prematurely.
• Cars are a depreciating asset, which means the longer you own a car, the more expensive repairs will be. On the other hand, many car leases also offer an operating costs package in the monthly payments, including maintenance and insurance.
• Most lease agreements require you to pay the remaining value at the end of the lease unless you renew it or upgrade for a new model (known as the residual value). Depending on the original cost of the car, the residual value may be quite significant.

The right financial choice when it comes to leasing or buying a car will depend on your circumstances. Therefore, consider your money situation and your employment status and make sure you understand all the lease terms and conditions before entering any agreement.

As with every article on TomorrowMoney, this is not personal financial advice. If you’re in debt and need help, you can speak to a financial counsellor for free via the National Debt Helpline: 1800 007 007.