What is a finance lease?

Fri 03 Nov

Car lease and finance lease are terms you might have heard before but do you really know what they mean? While it’s easy to think of a lease as something akin to a very long rental agreement, there’s a little more to it than that.

Also known as an Asset Lease, Vehicle Lease, or Car Lease, a finance lease is a form of car finance that allows a customer (that’s you if you’re a business owner) the use of a commercial vehicle or car while enjoying all the benefits of ownership. However, technically the financier owns the car until you finish your lease term and make the necessary residual payment.

And what’s a residual payment you might ask? Well, we’re getting a bit ahead of ourselves here so before we get to that let’s first take a quick look at how the finance lease works.

How does it work?

When you decide to lease, your finance provider will buy the car and then allow you the use of it once you pay a deposit (if necessary) and the agreed upon monthly payments.

Now, the thing about a car lease is that you are not committed to buying the car at the end of the term which is a benefit that suits business owners who are uncertain about the future of their company. But no matter what your reasons are – a new-found aversion to the color blue or even the alignment of the planets – once the term is up, you can simply return the car to your financier and walk away.

However, most people choose to either buy the car outright by paying a final payment (that residual one we mentioned earlier) or trade it in for a new model and continue with a new lease agreement.

So what’s so great about it?

Well, there are a number of reasons why finance leasing is a great option.

You can choose your term

Typical contract terms range anywhere between 12 to 60 months which gives business owners and sole traders a lot of freedom. Like we mentioned earlier, this is particularly beneficial to new businesses that aren’t quite so sure about the future.

You know all your costs up front

Depending on your lease agreement, you may have road tax and servicing included in your monthly payments. You’ll also have a fixed interest rate so each monthly payment will be the same for the duration of the term.

You get new car benefits

And we’re not just talking about that new car smell. With a car lease, you get the latest model (of course) and the peace of mind that it is under warranty for at least 3 years. And once your lease is up you can simply start all over again with a new car, a new lease, and a new warranty.

You can pay ahead

Some people like to make their lease payments in advance for tax deduction purposes or if they have the cash on hand at that time. With a finance lease, this isn’t a problem at all, and it’s a benefit that many business owners like to take advantage of as it offers them some flexibility with their budgets.

You pay less

As we mentioned above, if you decide against buying the car outright then you don’t need to pay the residual which effectively means that you’re paying less for the use of a car. But that’s not all. Your financier is entitled to claim back the GST from the purchase price of the car, so your lease agreement (and monthly payments) are calculated on the value of the car before GST is added. And that means that you pay less which leads us to your next benefit.

You can claim GST paid as an input credit

Now while the GST is taken off the price of the car in order to calculate your payments, you still have to pay it at some point. The monthly lease rental and the residual payment will have GST charged on them but (and it’s a pretty big ‘but’) if you are registered for GST then you can claim some or even all of the GST that’s in your lease as an input credit your next Business Activity Statement. And what does that mean? It means more money in your pocket of course. These last two are definitely our favourite benefits.

So how can I get one of these finance lease agreements?

First off, a finance lease is best suited to people that run their own business or companies that use the vehicle primarily for business-related purposes. So if that sounds like you (or your company), then all you have to do is get in touch with us on  1300 STRATTON (1300 787 288), and we can set the ball rolling. 

Now, if you’re an employee don’t worry, you can still opt for a form of car leasing called the novated lease. This is where your vehicle comes as part of your remuneration package from your employer and your payments are deducted from your salary. It’s a little different to regular car leasing in that you, not the financier, own the car.

So what are you waiting for? Get in touch today, and we’ll help you decide what financing option best suits your needs and get you on the road asap.

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