Should you buy or lease a company car? - HSG Group
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Should you buy or lease a company car?

With the 30 June End of Financial Year looming once again, you may be looking for a new vehicle.

So, should I buy or lease the vehicle?

 

Why Buy?

The main reason a business would buy a car is so that the business owns the asset.

A chattel mortgage is a type of loan a lender may offer you to buy a vehicle. While the vehicle or equipment is owned by the business, the lender uses the vehicle as security against the loan. This gives the lender piece of mind you’ll pay back the loan. It’s much like a fixed rate traditional home loan or mortgage.

The benefit of tax deductions may make this an attractive option. Typically, the business can claim expenses such as fuel and repairs and maintenance.

Similarly, interest payments and depreciation – which can be significant – can also potentially be claimed as a tax deduction.

A car under chattel mortgage may also attract lower insurance premiums, which can offer considerable savings.

If financing the vehicle, the business will also need to consider how much deposit is required, and the opportunity cost of those deposit funds.  Normally, the lower the deposit required by a lender, the higher the risk, which means higher interest rates; and vice versa.

You can also repay your loan early, however, there will generally be additional costs which need to be considered.

A chattel mortgage gives you ownership of the vehicle right away and the business pays off the loan from the income of your business.

So why lease?

The second option for a business is to look at leasing a vehicle.   A lease is essentially a long-term rental agreement, and the business won’t normally ever have ownership of the vehicle.

There are three main types of vehicle leases: finance leases, novated leases and operating leases.

  • A finance lease is where you pay a lender to use the vehicle, much like a long-term rental agreement. The lessor takes the risk on the purchase and resale of the vehicle, and it frees up your business capital that may otherwise be tied up with ownership of the asset. Your business will then pay monthly instalments, or rental payments, for the duration of the lease period. At the end of the lease, you’ll have the option to either pay out the residual value of the vehicle or return the asset with no resale value risks.
  • A novated lease is an arrangement between the business, an employee and a lender.  It’s akin to ‘salary-packaging’ that helps finance either new or used vehicles with repayments made by the employee from their pre-tax salary, bundling all the vehicle’s expenses into one simple payment.  It is important to note that the vehicle is not owned by the business, as the novated lease is in the employee’s name.
  • An operating lease is a rental agreement used to finance a vehicle, usually for shorter terms than above.  The vehicle is then returned to the lessor at the end of the lease period without any further obligation.  Under an operating lease, the business can not buy the vehicle at any point throughout the lease.

In Summary

Both a chattel mortgage and a lease can help a business however in terms of which is more ideal, it all depends on the unique business circumstances.  It’s also important to consider cash flow, debt balances, current assets owned and performance metrics when weighing up options.

If you’ve got any questions about chattel mortgages or leases, or if you’d like to chat about what option might be best for you, feel free to get in touch with us.

 

 

If you would like to chat to us about purchasing or leasing a vehicle, or about finance and/or property in general, please feel free to give us a call on 02 8004 2222 or book an appointment.

Although we are located in Crows Nest, we service clients from St Leonards, Artarmon, Wollstonecraft, Cammeray, Northbridge, Naremburn, Neutral Bay, Greenwich, North Sydney, Waverton to Willoughby and all areas of Greater Sydney.

PS  This article is prepared based on general information. It does not take into account individual financial or property objectives or needs and is not financial product or investment advice.