For most of us, buying a new car will be one of the biggest purchases we ever make. There’s the challenge of choosing the right type of vehicle for your business or lifestyle, choosing the colour and of course, then there’s the price tag.
Quite often the cost of the new vehicle you need or want, is much greater than what you had originally budgeted for. In these circumstances, the option to buy a new car can be a big financial hurdle. One that you simply cannot afford.
If you find yourself in this situation, then a finance lease might be a good option for you.
What is finance leasing?
Simply put, a finance lease is a type of car finance that allows you to get the car of car your choosing. In return for making fixed monthly payments, you get full and unrestricted use of the vehicle along with all the benefits of ownership. The actual ownership of the vehicle however lies with the finance company. At the end of the finance lease you can pay the agreed residual value (the final instalment) and take ownership of the vehicle or trade it in. You may also choose to re-finance the residual amount and continue with the lease.
How does a finance lease work?
Once you have decided on the make and model of the vehicle you wish to lease, you can usually request a quote from your chosen vehicle dealership. You can then pass this quotation onto your broker or finance company for processing.
Your finance broker will discuss your requirements and personal circumstances with you and possibly make some recommendations. At this point they will contact a wide range of financial institutions and negotiate the best finance lease option for you. If you are happy with offer, your broker will forward your application forms and supporting documentation onto the finance company.
At this point, if your application is approved, the finance company will then purchase the vehicle on your behalf. At this point, you (the lessee) will rent the vehicle from the finance company (the lessor) for an agreed term/period. This term is traditionally within a time frame of 12 – 60 months but you may be able to negotiate for a longer term if required. Some finance companies do offer a longer leasing options but this could result in you having to pay more than you would under the traditional 12 – 60 month leasing term.
At the end of the lease term, you (the lessee) may have the option to:
- Re-finance the vehicle for another term
- Pay any residual value left on the vehicle and take ownership
- Pay any residual value and then sell it
- Sell the vehicle and replace with a new leased vehicle
What are the benefits of a finance lease?
There are several benefits with a finance lease. Generally, you can choose your repayment term with the finance company. Typically, this can be anything from 12 – 60 months. Depending on your finance company, longer terms might be offered or can be negotiated. The longer the repayment term, the lower your repayments will be.
- Your finance company may be able to offer you 100% finance.
- Your lease repayment should be 100% tax deductible.
- You will be able to claim the GST back on your lease repayments.
- Because no deposit is needed for a finance lease you can use your asset right away without touching your capital.
- With a finance lease agreement, you will know exactly what your costs are going to be. Your lease agreement may even include regular servicing costs and road tax included as part of your monthly repayment. The lease agreement will have a fixed rate of interest, so all your monthly payments will be exactly the same. Knowing what your payments are going to be in advance makes budgeting an easier task.
- You have peace of mind knowing that your new vehicle will be covered under the manufacturer’s warranty. The warranty usually covers the vehicle for a minimum of 3 years. Once your lease expires you also have the option of starting again with a new vehicle, lease agreement and warranty.
- A finance lease may also allow you to make lease payments ahead of time for tax deduction reasons.
- You can upgrade your vehicle to the latest model when the lease reaches its termination date.
Interest rates and fees
You will have to pay some fees as part of your lease. These fees may include some or all of the following:
- Administration costs · Service costs
- Brokerage costs · Discharge costs
- Documentation costs · Acquisition costs
If you don’t know what is included in a specific fee, be sure to ask for clarification.
As part of the finance lease approval process, your finance company will have to take certain factors into account.
These may include some or all of the following:
- Proof of your income
- Your assets
- How long you have been in business
- Your credit history
- The profitability of your business
- A valid Australian Business Number (ABN)
- The business must be registered for GST
- The vehicle is primarily for business purposes
It is possible that you may also be asked to submit profit and loss statements and balance statements as part of the application process.
Things to be consider
- You can usually expect your lease repayments to be lower than traditional loan repayments. However, the insurance costs included into your finance lease could offset this financial benefit.
- You (the lessee) will be responsible for any maintenance and repair fees unless these are specifically included as part of your monthly repayment.
- At the end of the term you will be required to pay the residual value on the finance lease. The residual value (final payment) could possibly be more than what the vehicle is actually worth.
- Keep a lookout for any unnecessary or unwanted insurances included in your lease and be sure that you fully understand all inclusions documented in your lease before signing. Ideally you should also request a Public Disclosure Statements for all insurance products mentioned within the lease. You should have the right to exclude any insurances that you consider unnecessary.
It is important that you fully understand all the termination clauses within your lease, for both early termination and at the end of lease. Depending on the reason for the termination of the lease, there may be charges, early termination fees or penalty fees applied. You should also have a clear understanding on what will happen if you default on your lease repayments, including what happens to the vehicle.
Frequently asked questions
Will leasing a vehicle impact my credit rating?
A finance lease will affect your credit rating in the same way another loan does. A credit check will be carried out at the time of your application to judge your ability to meet the monthly payment schedule.
During the course of your finance lease, prompt payment will increase your credit rating. Whereas missed or late payments will lower your credit rating.
What is the residual value?
This is the outstanding total amount due at the end of the lease term. This responsibility for this amount falls to the lessee. The residual value will be documented within the finance lease agreement.
What happens if I want to purchase the vehicle once the lease expires?
If you decide to purchase the vehicle at the end of the lease, you will pay the outstanding balance on the vehicle (the residual value) plus the GST.
What happen if my vehicle is stolen or written off?
Your vehicle may be written off if it is damaged in an accident or stolen. For insurance companies usually treat a ‘write off’ as the market value less your deductible. Your insurance settlement may not necessarily be sufficient to cover your contractual obligations mentioned in your lease. You may need to consider taking out additional protection cover if your existing insurances don’t cover this.
Do lease interest change during the lease term?
Your interest rate is fixed and will not change for the duration of your lease. The interest rate and repayment amount will be documented in the finance lease so you will know exactly how much needs to be paid on a monthly basis.
Who can drive the leased car?
All liabilities for the use of the car lie with you (the lessee) or as stipulated in the finance leasing agreement.
Ready to work with Mortgage World Australia?
Mortgage World Australia have been advising and assisting clients with their leasing requirements for almost two decades. They are linked to over 30 lenders in Australia including all the major banks, building societies, non-bank lenders and a host of other financial institutions. With such a wide variety of leasing and lending options at our disposal, you can be confident that we will be able to negotiate the best finance lease deal for your needs and your budget.
Contact one of our friendly staff at Mortgage World Australia and let us help you get the best deal and the car of your dreams.