Lease, Rent or Buy: The Simple Guide to Motoring Economics

Buying the right car is a crucial decision to make. After your home, it is often the second most expensive asset one will buy. There are many variables involved including price, performance, safety, functionality, maintenance, resale...the list goes on. Amidst the “noise” of information that needs to be filtered, an important decision almost becomes an afterthought, and that is how to most effectively fund the purchase of your new asset. Common options available to you include:
  1. Vehicle lease
  2. Outright/cash purchase

An effective alternative to the above and one that is often ignored is car and truck rental. Lease Finance This is an arrangement where a financier (bank, broker or dealership) will purchase a vehicle on your behalf and you will in turn have to make monthly repayments for an agreed term. Your rights and obligations under the agreement will depend on the type of lease agreement. Common arrangements include: For Businesses/ABN Holders: Hire Purchase, Chattel Mortgage, Overdraft facilities For Individuals: Basic car loans, Novated Leases Pros of this type of finance include:
  1. Fixed interest rates, terms and hence repayments making cash flow budgeting more predictable as well as hedging against interest rate rises
  2. Depending on lease type, GST can be claimed upfront
  3. Balloons or residual payouts can be negotiated allowing you to free up cash flow
Cons include:
  1. Repayments can generally not be varied once committed to, unlike a line of credit
  2. Benefit of favourable movements in interest rate would not be realised
  3. Penalties may arise in the case of any early termination
  4. In most cases risks associated with ownership including running costs will be passed on to you
Outright purchase This is the most obvious way to purchase an asset. For a business however this may not be the most efficient, consider the following: Pros:
  1. No repayment obligations, however, one must consider the opportunity cost of the funds employed.
  2. There would be no exposure to adverse effects of fixed term financing or movement in interest rates (where borrowing is on variable interest rates).
Cons: Most motor vehicles depreciate up to 30% in the first 2 years and on average 75% over the first 5 years. Using capital to purchase an asset that would appreciate in value may make for a more compelling argument. Car and Truck Rental An effective yet often ignored option is truck and car hire. Sydney, for example, is a place where the level of competition in this industry has ensured that the right supplier can be found at the right price. Pros: 1. No commitments; once you identify the right vehicle, you can set about achieving the best price amongst the numerous car rental , Sydney based providers. Rental terms can be as long or short as you like, even daily, and as such if there is a change in your requirements you can end the agreement by simply returning the vehicle. 2. Risks associated with ownership remain with the rental company. Insurance, maintenance, registration and most importantly depreciation expenses are borne by the car rental company. 3. Only pay for what you use; on days where the rental car or truck may not be utilised, for instance weekends, it can simply be returned ensuring you can minimise overheads. 4. Access to new vehicles: Most reputable car rental companies in Sydney will rotate rental cars every 1-2 years. This will ensure that you benefit from technology enhancements including fuel economy, safety and ergonomic features for your drivers. 5. No down time: Should your rental car or truck be involved in an accident or mechanical breakdown, a replacement will be on hand without fuss or delay. (Please note, however, that with at fault accidents, there may be an increased excess stated on the contract). Cons There may be some restrictions on the vehicle you rent such as areas of use, kilometres per day, age of driver etc. However, shopping around and negotiating better terms can help achieve terms to suit your particular application. Whilst businesses and individuals may have a unique set of requirements, the financing options available are by and large “one size fits all”. An exception to this remains car and truck rental that provides the greatest degree of flexibility and cost effectiveness.