There was a time not so long ago when the options for getting a new car were to either buy it yourself or hope that you were given a company car as part of your job. But today the choice is wide open with finance products that range from the traditional bank loan to novated leases, all aimed at getting you behind the wheel.

In determining what finance product is best for you, you first have to decide whether you should buy or lease. The essential difference here is that if you buy a car, you own it and it is yours to do with as you please.

Leasing a car means that you are only paying for the use of the car and at the end of the lease term, officially, you have to hand it back or take out another lease. The legalities get a bit murky here and in practice, it is possible to buy the car at the end of the lease period under certain types of leasing packages but we will go into that later.

There are no hard and fast rules as to whether leasing or buying suits people better and it is a topic that should be discussed with an accountant. But having said that, if you use your car for business and private purposes or your employer is willing to include a car as part of your salary package, then leasing is well worth looking at. There can be significant tax advantages especially for cars in the prestige and luxury sectors.

Although leasing has taken off in the private sector to a large degree in the US and Europe, we still have an ownership culture and while the numbers of private or semi-private lease deals are growing, the vast majority of people here still buy their cars and own them.

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TYPES OF PURCHASE FINANCE

Hire purchase/Consumer Loans
The most common product sold is still the traditional hire purchase or consumer loan.
The period of the loan is determined, the interest rate set according to the risk, the value of the loan and market conditions and the monthly repayments are set to pay out the full amount by the end of the term. Terms usually vary between one and five years.

A variation on the hire purchase product known as the balloon payment option is also slowly growing in popularity.
By setting a larger balloon payment for the end of the term which can vary according to individual circumstances, you can reduce your monthly payments to better balance the budget.
At the end of the term, you can either pay out the full amount in one hit or refinance the balloon amount and continue paying off the car in monthly instalments.


TYPES OF LEASE FINANCE
Lease products fall into two categories as either a finance lease or operating lease and vary in the way they treat ownership, disposal and residual risk on the vehicle.

Finance lease
Finance leases are becoming increasingly popular because of the ability to novate the lease.

As a lease, no deposit or trade-ins are made and the monthly payments are worked out based on the term of the lease, interest on the finance charge and the residual value of the car at the end of the term.

However, you are the one who takes the risk on the residual and if at the end of the term the market says the car is not quite worth what was expected three years earlier, then the responsibility to make up the difference to finalise the contract is yours.
Although under the definition of a lease you gain no equity in the vehicle, it is common practise under finance leases to make an offer for the vehicle at the end of the term and pay out or refinance the residual to take ownership.

Novated Lease
Novated leases are becoming a very popular way of including a car as part of your salary package to help reduce your taxable income.

You take out a standard finance lease on a vehicle of your choice. You then arrange for the lease payments to be paid by your employer through a novation agreement which remains valid as long as you stay with the company.

The lease payments, running costs and fringe benefits tax any car supplied to an employee for their private use is subject to FBT calculated on a sliding scale depending on the value of the vehicle and annual kilometres travelled are then taken out of your pre-tax salary.

If you resign or the words forced redundancy start being bandied about in the canteen, then the responsibility for the vehicle and the subsequent lease payments reverts to you.

At the end of the lease, the choice is there to turn over the vehicle into a new lease, trade it in on a new car on a novated lease or even purchase the vehicle through a third party.

As with any standard finance lease, the responsibility for the residual lies with the lessee and if at the end of the term, the market for used Porsches has taken a dive then it is you who must make up the difference to finalise the lease contract.
But similarly, if there is a sudden demand for purple Range Rovers and you have acquired, and then decide to sell, the vehicle, you are not subject to either a property fringe benefit tax or tax on any profit made on the sale of the vehicle.

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