Loan Verse Lease?
Loan -v- Lease – What’s your preference? And what’s the difference?
Tell us what your preference is when you are looking at a New Vehicle or Equipment for your Business…
A Loan or a Lease?
And, what are the differences?…
1) Ownership of the Vehicle:
With a Loan you own the vehicle with an encumbrance from the financier and this will appear on your Balance Sheet as an Asset and the Loan as a Liability.
With a Lease, the financier owns the vehicle and this will not appear on your Balance Sheet.
2) The amount of deposit required:
With a Loan, the amount of deposit required is dependent upon the applicant’s financial position. If you are a property owner, usually no deposit is required. If you rent and have no real estate assets, then somewhere between 10% – 30% of the cost price of the vehicle or equipment may be required. Loans can also be structured to include a Balloon payment at the end of the term of the Loan, to reduce the repayments.
With a Lease, there is usually no deposit required, however, there will be a Residual Payment due at the end of the Lease and this is governed by ATO guidelines.
3) Repayments claimable (if the vehicle or equipment is purchased for business purposes):
With a Loan, all of the interest paid and the vehicle depreciation, is claimable in your tax (the principal part of the repayments is not claimable). On a side note, no GST is in the repayments but you may be able to claim the total GST portion of the vehicle or equipment in your next BAS.
With a Lease, the full net repayment less the GST amount of the repayment, is claimable (and the GST portion of each payment is claimed in your BAS).
You can speak with us (in conjunction with your accountant) to discuss what suits your financial needs and cash flow.
4) Other claimable items (if the vehicle or equipment is bought for business purposes):
With both a Loan and a Lease, you can claim all running, maintenance, registration, insurance costs etc (less any portion used for private usage if applicable).
With certain Leases, i.e. Operating Leases or Novated Leases, cost can be included in the finance or the employee/employer agreement (see below for the definitions of various types of Leases) and for further information on what is claimable, please speak with your accountant.
Both Loan and Lease applications are assessed on your ability to make the payments from your business profitability and cash flow.
6) Cost of Early Sale:
If you need to sell the vehicle for any reason prior to the end of the Loan or Lease term, the payout is usually less with a Loan, compared with an Equipment Lease and this is because of the way the payout is calculated.
7) At the end of the Term:
With a Loan, at the end of the Loan Term, you will own the vehicle or equipment outright (assuming there is no Balloon).
If there is a Balloon, you can either:
– Refinance the Balloon payment over an extended term.
– Payout the Balloon amount.
With a Lease, you will have three options at the end of the term:
1. Hand the vehicle or equipment back. In this instance, the lender sells the vehicle or equipment and any profit goes to the financier/bank, and any loss you are responsible for.
2. Refinance the Residual payment over an extended term.
3.Payout the Residual amount on approval from the Lender.
There are 3 different types of Leases:
1) Commercial Lease: For Business or Self-Employed Customers. Generally, Commercial Leases are for business’s who only want the vehicle or equipment up to 60 months or, they are looking to turn around or upgrade new vehicles or equipment on a regular basis.
2) Operating Lease: Incorporates ongoing costs on top of the repayments, including registration, maintenance, insurance, servicing (i.e. fleet cars or, Operating Leases are also suitable for companies who only want a vehicle for a short time or up to its 20,000kms. At the end of the term, they hand back the vehicle or equipment.
3) Novated Lease: An agreement between the Employee and Employer (and the vehicle is usually a part of the Employee’s Salary Package). It can be an economical option for a vehicle for the employee due to the tax benefits (as the repayments are paid from pre-tax dollars) and usually, the agreement includes fuel, insurance, registration and maintenance.
To find out more or to discuss what is most suitable for you, phone Pearl Finance on 07 3812 3430 or, go to our contact page to make an enquiry.