Lease, cash or borrow? What’s the best way to finance your next car purchase?
So you’ve got your eyes on a new pair of wheels. Whether it’s for work, picking up the kids from school or just for getting from A to B, at some stage of your life you’re probably going to need to purchase a car! But how to pay for it? If like most people, you don’t have 20K+ cash just lying around there are a number of finance options available. And even if you do have the cash, choosing an alternative way to finance your car may actually be a better financial decision in the long run.
I’ve created a list of the pros and cons of the various financing options below:
- Most lease arrangements allow you to salary sacrifice a part of your payments which can be beneficial and result in a significant tax saving (up to 35%). As a general rule of thumb, the tax benefits associated with a lease are generally only worth it if the car is worth more than $55K.
- Leasing ensures you always get to drive the latest model
- You don’t suffer the decline in value through depreciation
- Leasing can be an expensive option! Read the terms carefully and talk to a trusted financial advisor to work out if it’s the best option for you.
- A leasing arrangement will reduce your take home pay
- Difficult to get out of the contract if you need to
- Higher admin requirements for businesses who allow salary sacrifice
- A loan may allow you can buy a new/better quality car which may cost you less money in the long run (minimal repair costs)
- Generally cheaper to run than a lease because the interest rate is usually lower
- Another repayment/bill to add to the list
- The debt will show when applying for other forms of credit such as a home loan
- There may be a balloon repayment (or a lump sum payment) at the end of the loan
- Once you’ve bought it it’s yours! No more repayments.
- No interest!
- Clear title i.e. you and only you own the car
- If you’re buying a cheap second hand model the car may end up costing you more money in the long run in repair costs.
- Paying cash upfront can put a serious dent in your savings
- If your car costs less than $55k and you have the cash, consider using it
- If your car costs more than $55k and you have a salary that can support it, a lease may be the most tax effective option
- If your car costs less than $55k and you don’t have the cash, a loan could be the best option (just make sure you can service the loan repayments!)