Leasing a car in Australia: Who, what, when, where, why and how!

Buying a car outright - a new car, no less - has long sat just below the increasingly Everest-like peak of Australian aspiration; home ownership. Indeed, for most of us it is the second-largest financial decision of our lives.

The key difference is that when you own a home, you return each night to a warm bed and the comforting reassurance that the roof over your head is appreciating in value.

Cars, on the other hand, have a nasty habit of greeting you each morning as a rapidly depreciating lump parked on the driveway.

Leasing (whether novated, finance, or operating) offers a compelling alternative to outright ownership, provided you know exactly what you’re signing up for.

Essentially, leasing a car equates to renting one – usually for a set period between two to five years, with fixed monthly payments.

When the lease concludes, rather than having to face the cost of depreciation you face when buying a car outright (unless it’s a rare Ferrari or similar), you can simply hand the keys back and move on – ideally straight into another shiny new lease.

Before discussing how to lease a car, however, it’s important to understand the different options available.

The most popular is what’s called a novated lease, which is an arrangement where your employer helps manage your lease payments directly from your pre-tax salary (a state of payroll martyrdom called salary sacrificing, which sounds a lot more bloody and alarming than it actually is).

This reduces your taxable income and subsequent income tax bill, potentially freeing up more disposable cash for life’s little pleasures, or the big ones, like paying off your house.

How does a novated lease work? Running costs like registration, insurance, fuel, and servicing are likely to be bundled into your monthly payments.

It will also involve Fringe Benefits Tax, which is calculated based on the vehicle’s value and annual kilometres travelled.

At the end of your lease, you’ll face a balloon payment (think of it as a large sack filled with money rather than air) that will have been agreed in advance.

You can pay that figure to take ownership of the vehicle outright (if, say, you’ve fallen hopelessly in love with it) refinance the residual through another lease or loan, or sell or trade in the car to pay it off.

If the car’s market value exceeds the residual, you’ll pocket the savings. If not, you’ll have to cover the shortfall.

Finance leases take a more bread-and-butter approach for those who intend to eventually own their leased vehicle.

It’s a direct agreement between you and a finance provider, where you make regular monthly payments and agree upfront on a residual value – a lump sum to purchase the vehicle outright at the lease's conclusion.

It's important to consider this residual value carefully, otherwise you might end up owing more than the vehicle's market worth.

Lastly, there are operating leases – which are popular among businesses and people who don’t like to be tied down. They tend to be more of a short-term arrangement than other leasing options and usually include maintenance costs.

You use the car, make fixed payments, and simply return it when the term ends – leaving you free to switch vehicles as you please.

But every financial arrangement has its thorns, and so too, car leasing comes with both advantages and drawbacks, compared to buying.

Leasing typically requires less upfront capital and offers lower monthly repayments compared to traditional car loans.

Additionally, maintenance and running expenses can be bundled in to your payments, so you’re less likely to be blindsided at service time.

The flipside is you won't own the vehicle unless you settle the residual, which may leave an aspirational itch unscratched for some. Plus, leases usually impose strict kilometre limits and expectations regarding vehicle condition, meaning rough treatment might incur additional costs when you return it.

Comparing leasing to buying ultimately depends on your attachment to vehicle ownership and your overall financial goals.

Leasing provides flexibility and can offer tax advantages, which can be particularly appealing to individuals or businesses looking for predictable costs and minimal initial outlay.

On the other hand, buying outright offers complete ownership freedom paired with depreciating vehicle value.

So, how do you lease a car in Australia? Firstly, put your thinking cap on and decide which lease type best fits your needs. Shop around for providers, compare deals, and pore over the fine print, repayment schedules, and residual amounts.

After all that due diligence, you’ll hopefully drive off knowing exactly what you're responsible for.

Like most major decisions in life, the best leasing option hinges on your personal and financial situation (and it might be worth consulting your accountant, or a taxation professional, before making your decision).

Novated leases suit employees looking to leverage tax benefits through salary packaging. Finance leases appeal to businesses and individuals aiming to ultimately own the car without the initial cash outlay. Operating leases are a sound choice for those who want flexibility and an easy exit.

You should, of course, be mindful of potential pitfalls across all leasing options. Changing circumstances, such as a job switch, could leave you liable for ongoing novated lease payments.

Administration fees and potentially higher interest rates compared to traditional loans should also be factored into your decision making.

Ultimately, leasing isn't inherently better or worse than buying – it's another financial tool available to help you drive the car you want, sooner.

Whether leasing is right for you depends entirely on your specific circumstances, financial position, and a knack for understanding fine print.

This material has been prepared for information purposes only. It should not be taken as constituting professional advice and you should consider seeking independent legal, financial, taxation or other advice to check how the information relates to your unique circumstances.