Unlike those buying their own vehicle, a person leasing a car is effectively borrowing their wheels in exchange for a recurring fee. If you don’t have the lump sum needed to buy a car outright, leasing one could offer benefits and drawbacks over securing a car loan.

Perhaps the most important things to consider before signing up to either a lease agreement or a car loan are the overall, ongoing costs associated with each option. Sounds simple, right? Well, that’s until you consider potential tax benefits, running costs, and interest payments, to name a few complications. 

Fortunately, we at Savings.com.au have done the dirty work and created this guide to help you decide between a car loan and a car lease.

How does leasing a car work?

There are three major options available to Australians looking to buy (and pay for) a new car. First, they could stash away a significant chunk of cash. Second, they could secure a car loan, whereby a lender gives them money to buy the car and they pay it back, plus interest, over a specific term. Or, third, they could choose to lease a car – essentially ‘borrowing’ a vehicle and regularly paying to use it over a set period – typically two to five years.

Like renting a house, leasing a car doesn’t grant you ownership rights over it. But, while a leased car is not technically yours, it still largely serves its purpose.

In the market for a new car? The table below features car loans with some of the lowest fixed and variable interest rates on the market.

Lender

VariableNew1 year
More details
  • Available for purchasing new and demo vehicles
  • $5,000 to $150,000 loan amount
  • Redraw facility available up to $5000/day
  • Required: Good credit history, stable employment history. Aus citizenship or PR.

New Car Loan - Home Owner Special

  • Available for purchasing new and demo vehicles
  • $5,000 to $150,000 loan amount
  • Redraw facility available up to $5000/day
  • Required: Good credit history, stable employment history. Aus citizenship or PR.
FixedNew99 years
More details
Loan amounts from $2k to $75k
  • Available for any new motorised vehicle
  • No ongoing or early exit fees
  • 1-7 years loan terms. Pay monthly, fortnightly, or weekly
  • Get quick decision. Funds in 24 hrs if approved
Loan amounts from $2k to $75k

New Car Loan

  • Available for any new motorised vehicle
  • No ongoing or early exit fees
  • 1-7 years loan terms. Pay monthly, fortnightly, or weekly
  • Get quick decision. Funds in 24 hrs if approved
FixedNew1 year
More details
Approval within 24 hoursEarly payout available
  • Required: Good credit history, stable employment history. Aus citizenship or PR.
Approval within 24 hoursEarly payout available

New Car Loan - Special (Fixed)

  • Required: Good credit history, stable employment history. Aus citizenship or PR.
FixedNew2 years
More details

New Vehicle Fast Loan Low Rate

    Important Information and Comparison Rate Warning

    All products with a link to a product provider’s website have a commercial marketing relationship between us and these providers. These products may appear prominently and first within the search tables regardless of their attributes and may include products marked as promoted, featured or sponsored. The link to a product provider’s website will allow you to get more information or apply for the product. By de-selecting “Show online partners only” additional non-commercialised products may be displayed and re-sorted at the top of the table. For more information on how we’ve selected these “Sponsored”, “Featured” and “Promoted” products, the products we compare, how we make money, and other important information about our service, please click here.

    The comparison rates in this table are based on a loan of $30,000 and a term of 5 years unless indicated otherwise. The comparison rates for car loans and secured personal loans for the relevant amounts and terms are for secured loans unless indicated otherwise. The comparison rates for unsecured personal loans are applicable for unsecured loans only. WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. Comparison rates are not calculated for revolving credit products.

    Monthly repayment figures are estimates only, exclude fees and are based on the advertised rate for the term and for the loan amount entered. Actual repayments will depend on your individual circumstances and interest rate changes. Rates correct as of May 24, 2024. View disclaimer.

    Car leasing options

    Novated leases

    A novated car lease is an arrangement between three parties – an employee, their employer, and a finance company – wherein the employer agrees to make car lease payments to the finance company from the employee’s pre-tax salary (a form of salary sacrificing)

    Doing so reduces the employee’s taxable income. However, it might attract fringe benefits tax, which is payable by the employer. 

    A car ‘purchased’ under a novated lease doesn’t have to be used by the employee for work – it can be entirely for personal use. Thus, most employees are eligible for a novated lease if they have their employer’s approval. Such leases are often packaged up to include operating costs like fuel, maintenance, and insurance, which can alleviate the burden of paying for such costs individually.

    At the end of their lease, the employee can typically either keep the car and pay any ‘residual value’ – known as a balloon payment, sell or trade-in the car and lease another car, or extend their lease on the same car.

    Finance leases

    Cars used by businesses can be paid for through a finance lease. Under such a lease, the vehicle is bought by a finance company and rented out to the lessee over a lease period. At the end of this period, the lessee is obligated to either purchase the car from the finance company by paying the residual value or lease the car all over again.

    Operating leases

    Operating leases are like a finance lease except the lessee is not responsible for the residual value at the end of the lease – the car is simply handed back to the finance company. Some businesses with a high turnover of vehicles use operating leases to reduce administration costs.

    Leasing vs buying a car with a car loan: pros & cons

    If you’re thinking of buying a car with a car loan, is it worth considering a car lease instead? A look at some of the pros and cons of both options could help provide a better idea of what’s more suited to you.

    Car Lease Pros and Cons

    Pros:

    • Cheaper recurring payments: Compared to a monthly car loan repayment, a monthly lease payment is often cheaper.

    • Drive the latest models: With leasing, it’s easy to switch to a new car every few years, allowing you to have some of the latest car safety and technology features.

    • Easy maintenance: Many car leases come with a maintenance package, with costs like servicing, registration, insurance, and even fuel included in the regular lease payments.

    • Tax benefits: Leasing a car for commercial purposes or under a novated lease arrangement can generate significant tax savings for some. For more info about such potential savings, talk to a registered tax agent.

    Cons:

    • You do not solely own the car, so you can't sell it: Until you pay the balloon payment (residual), the car's title is in the finance company's name and you cannot sell it. 

    • You may be restricted from making modifications: It's likely you'll need permission from the lease company if you wish to modify a leased car’s design or performance. 

    • Driving restrictions: Many leases have restrictions on how many kilometres you can drive the car over a set period and how much wear and tear it endures. Breaching these restrictions might attract extra costs.

    • High long-term cost: When you do the total calculations, continually using car leases is often more expensive over the long-term (such as five two-year leases over ten years) than simply buying a car with a car loan and sticking with that same car for a decade.

    Car Loan Pros and Cons

    Pros:

    • You own the vehicle: Buying a car with a car loan puts the car's title in your name. Though, you won’t hold 'clear title' until the debt is paid off. Until then, the lender will hold an 'interest' in the car.

    • You can do what you want with it: As the owner of the vehicle, you’re free to drive it as much as you like, wherever you like, or modify it however you want.

    • You can sell the car: Even if you still have a debt owning on the car, you're generally free to sell it – although you should talk to your lender before doing this 

    • Power to compare: There are many car loan providers in Australia offering secured or unsecured car loans at fixed or variable interest rates. Car loan customers have the power to shop around to find a good value product with the right features for them.

    Cons:

    • Higher recurring payments: Since you’re paying off the total cost of the car (instead of merely paying for its use), car loan repayments are usually higher than lease payments.

    • Repair bills: As the car gets older, it's likely that more expensive repairs will need to be done.

    • Selling hassle: If you want to get a new car, you’ll probably have to deal with the hassle of selling the car or trading it in.

    • Depreciation: New cars usually depreciate in value significantly, particularly in their first couple of years. As the car’s owner, you’ll have more money tied up in this depreciating asset.

    Leasing vs financing a car: what to remember

      • When leasing a new car, you’re essentially paying for the vehicle’s depreciation, with the car’s value falling by as much as 60% over the first few years. By repeatedly taking out a lease on a new car at the end of each lease term, you’re basically always paying the top price.

      • Generally, the longer you’re going to hold the car, the more you’ll save by buying it instead of leasing it.

      • Beware of agreeing to a lease if you’re not sure you can commit to it over the entire term. Leaving a lease early might see you having to pay the remaining lease and the residual value.

      • Like a car loan, car leases require a credit check. If you have a bad credit rating, you may be denied a car lease.

      • If you’re driving a car significantly less than what the car lease permits (the maximum mileage), you’ll be doing an unnecessary favour for the finance company when you trade it in at the end of the lease. You’ll have paid for wear and tear that you didn’t even cause.

      • Many car leases do not allow you to choose your own insurance, so you may be stuck paying for a poor value car insurance policy.

      • If you were to lose your job while under a novated lease, the lease will become a consumer lease, meaning you might lose the benefits of tax deductions or a maintenance package.

      • A novated lease is paid with your pre-tax salary so, depending on a range of factors such as your salary and the cost of the car, it can make your dollar go further and reduce your tax payable, making it cheaper to lease the car instead of buying one with a car loan.

      • It can be risky to rely on tax benefits as government regulations can change.

      How to lease a car with bad credit

      In some cases, you can still lease a car even if you have bad credit in Australia – it will just depend on what your credit score actually is and how generous the dealer is. You might have to put up with higher lease payments and fees or succumb to less favourable terms, however.

      When leasing a car through a novated lease arrangement, many finance companies will overlook a bad credit rating as they’re technically receiving the payments from your employer.

      Car Lease vs Car Loan Case studies

      Kendall is an auto tech fan who prefers leases

      Kendall-car-lease

      Kendall is obsessed with cars and loves driving the latest in car tech. She enjoys picking up the keys for a flashy new car every couple of years and gets bored driving the same car for any longer than that, so she prefers to pay for cars through a novated lease.

      Kendall believes that driving a nice car every day makes her life happier, because it helps her enjoy the long commutes to and from work (she drives 45 mins each way). On top of that, she saves on tax.

      Kendall understands it might be cheaper for her to buy one car and hold it for several more years, but believes the joie de vivre (enjoyment of life) she gets from leasing new cars is worth the extra cost.

      Shinji chooses a car loan to buy his dream car

      Shinji-car-loan

      Shinji has fallen in love with a particular new car on the market but doesn’t have the cash to buy the car outright. He knows he could either buy it with a car loan or pay for it with a novated lease.

      He understands a novated lease might save him money, but doesn’t think he’ll stay with his current employer for much longer and he’s not sure if a future employer will agree to a novated lease arrangement. 

      Also, since it’s his dream car, Shinji wants to be its owner so that he can have the freedom to drive it as much as he wants and modify it with a new sound system, metallic wrap, hydraulics, and underglow neon lights.

      Savings.com.au’s two cents

      The biggest saving opportunity with a car lease often comes from the tax benefit you can leverage by paying for it with your pre-tax income. The risk here, of course, is that a change of employer could mean you lose this ‘pay-with-pre-tax-salary’ capability and your benefit could disappear overnight. Without this tax-driven benefit, you’re more than likely better off buying the car with a car loan. That’s particularly true if you plan to own the car for more than five or six years. Cars as an asset class generally depreciate quite quickly at the front end of ownership.

      However, this rate of depreciation can come down substantially in the ‘middle’ years of ownership from year five to year eight. That means, if you own the car (after paying off your car loan), those years can provide you with very cost effective motoring through slowing depreciation, even after taking into account the maintenance costs that often increase as cars age.

      Regardless of your decision, if you're considering a lease for what you believe will be tax benefit purposes, it's always wise to consult a registered tax agent, such as an accountant, for their professional advice on the matter.

      Article first published August 10, 2018. Updated July 17, 2023