How do I ... lease a car?

Reported by by Anthony O'Brien, Money Magazine
Thursday, November 8, 2007

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Mark BourisMyths bustedHome loans can seem a bit complicated and overwhelming. But it doesn't have to be. Mark Bouris clears up some common misconceptions.

By Anthony O'Brien,
Money Magazine
, November 2007

A leasing arrangement can get you on the road with less fuss than you might imagine — and can be financially efficient.

Securing a car through a leasing arrangement for your business is a legitimate and straightforward alternative to get the vehicle of your choice.

What is it?
A car lease is an alternate form of finance to a loan or hire purchase arrangement. Under a lease, business owners select the car of their choice but it is bought by the finance company in return for a series of payments. The lease term is typically between one and five years, with a residual (leftover) value outstanding at the end of the lease.

When the lease term expires you have the option to roll over the lease, exchanging the old car for a new one, thereby avoiding the residual payment. Alternatively the car may be returned to your finance provider to be sold, though you may be asked to meet any shortfall if the proceeds don’t cover the residual value. Paying out the residual amount or refinancing the residual figure can let you take ownership of the car.

Why do it?
Leasing has several pluses. Your business won’t need to make a significant capital outlay — a real plus for cash flow management — and the fixed payments of a lease allow for ease of budgeting. You’re also free to choose your own vehicle and negotiate the price you wish to pay.

From a business perspective, the lease payments can be claimed as a tax-deduction where the car is used to generate taxable income. If you run your business as a sole trader you can usually only claim the part of the lease cost that relates to business use. This typically means keeping a log book for 12 consecutive weeks to determine the percentage of use that relates to work.

If the business operates as a company, the full lease payments can be claimed, however fringe benefits tax (FBT) may apply to the proportion of the lease costs that relates to private use (although the good news here is the FBT is also allowed as a tax-deduction).

On a personal level, leasing makes it easy to upgrade your vehicle every few years.

Any pitfalls?
Perhaps the biggest danger when it comes to running a car through your business is your choice of finance provider. Gordon Harten of equipment broker Asset Lease Australia says finance provided by car dealers may be more expensive both in terms of upfront fees and the ongoing interest rate. "Dealer finance can also see add-ons like payment-protection insurance being stacked on to the deal, making it even more costly," he says. Using a business equipment broker (similar to a mortgage broker for home loans) can help you secure a good deal on a car lease.

Harten cautions that the term "lease" is often used interchangeably for a variety of vehicle finance options, so make sure you do your homework about the type of car finance you're being sold. The appropriate tax treatment can differ widely.

How do you do it?
Your accountant is a useful source of advice on the type of a car your business can afford to finance through a lease, and may even be able to recommend an appropriate form of finance through a bank or other finance provider.

Some of the factors that will be taken into account when you apply for lease finance include the length of time you’ve been in business, your credit history and the profitability of your venture. You may even be asked to provide profit and loss statements from previous years as well as balance sheets when applying for a lease.

The costs
Upfront costs can range from about $395 for dealer-arranged finance down to about $150 with an equipment broker. Harten says commercial interest rates on a lease for a car worth $20,000 to $50,000 can vary between 8.5% and 9.5%.

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