Is a car loan a good option for you?
When you need a car, whether it’s your first vehicle or an upgrade to a bigger and better model, you have the choice of:
1) buying a car outright with your own money,
2) leasing it or,
3) Getting a secured or unsecured car loan.
Most of us don’t have several thousand dollars lying around, so it’s a toss–up between a lease or a loan.
Car loan vs lease
Leasing is a popular option because you can have all the amenities of your own car for more modest monthly payments.
There are several different kinds of lease arrangements in Australia, some of which offer help. Novated leases, for example, are arrangements between you, your employer and a finance provider. Your employer makes the lease payments from your pre–tax salary so your taxable income is reduced, saving you money.
Cars on novated leases don’t have to be for 100 per cent work use; you can make personal use of it as well. There may also be packaged deals which include fuel, tax, maintenance and insurance.
Then there’s finance leases, where a car belongs to a finance provider and is rented to you for a set period. At the end of the lease you can either buy the car (you pay the remaining balance of the car’s value) or you lease it for another period.
If a finance lease isn’t for you, then an operating lease might be ideal. At the end of the period you just hand the car back.
Leases can be really useful and convenient, with a lot of the running costs taken care of by your company. However, you never own the car, no matter how long you lease it for, unless you buy it outright at the end. If you’d prefer to own the car eventually, then a car loan is probably the answer.
Why you should think about a car loan
While leasing is definitely convenient, finding a cheap car loan may be a much better alternative.
There are lots of advantages to financing your car.
With a loan, you own the car. You can use the vehicle as an asset for as long as you own it, and you own a little bit more of the car with every payment you make.
As your car is yours, you can modify it in any way you choose, you can drive it wherever you like and as much as you like. Many leases have restrictions, especially on annual mileage, with stiff penalties for exceeding your mileage allowance.
You can sell your car if you want or need to. The vehicle will have a resale value, which will go to you. You can’t sell a lease car however, so your monthly payments can’t be recovered.
You have more control of your loan because you can decide which provider to go with. When it comes to car loans Australia has a lot of market offerings, so make sure you use a comparison site when you’re exploring your options. Online car loans are increasingly popular and quick to set up.
The disadvantages of a car loan
You’re paying for the car in instalments, with interest, so even the cheapest car loan will usually be more expensive than leasing the same car. With a lease you’re paying for the usage of the car, not the car itself.
You’ll be faced with growing repair and maintenance costs as the car gets older; with a lease car, your employer or finance company deals with that side of things.
If you decide to sell your car, you’ll have to do all the legwork, which can be very time–consuming and, occasionally, very frustrating.
You’ll be hit by depreciation; cars lose most of their value in the first two or three years, before the rate of decline levels off over the next five. If you finance a new car, you’ll be paying into a rapidly depreciating asset.
Lease vs loan – a quick rundown
Leasing means you’re paying for something that will depreciate and you won’t own anyway.
If you’re always leasing new cars then you’re always going to be driving a great set of wheels but getting no other real returns. This is great if you’re a petrolhead and you can’t resist those amazing new wheels.
If you just want a reliable workhorse for ten years, then a loan is best and cheapest.
If you take a lease and you’re not totally sure you can keep up the payments for the whole term, you may end up paying for the remainder of the lease period. With a loan, you can sell the car to recoup some money if you need to.
As with a car loan bad credit might mean you’re refused a lease, unless you’re going through your employer. Car loans for bad credit can be easier to obtain because the car itself is an asset to secure the loan on (although you may have to pay more interest).
If you come in well under your lease’s maximum mileage then you’ll probably not cause the wear and tear that the provider builds into the lease payments; they’re getting the vehicle back in great condition. If you’re financing the car yourself, then conservative usage works in your favour instead too.
Lots of car leases won’t let you choose your own insurance provider, so you might have to pay for insurance that’s not as good as you could have found yourself.
If you have a novated lease and you lose or change your job, you’ll then have a consumer lease. You’ll lose any tax deductions and your maintenance arrangements.
You might be attracted to a lease because of the tax benefits, but these can be changed or even withdrawn if government policies change, making your monthly expense higher. Remember, even if you’re paying more each month on your lease, you still don’t own the car.
The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. If you or someone you know is in financial stress, contact the National Debt Helpline on 1800 007 007.