Lease, cash or borrow? What’s the best way to finance your next car purchase?

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:

Lease

Pros

  • 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

Cons

  • 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

Borrow

 Pros

  • 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

Cons

  • 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

Cash

Pros

  • Once you’ve bought it it’s yours! No more repayments.
  • No interest!
  • Clear title i.e. you and only you own the car

Cons

  • 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

In summary…

  • 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!)