Car Lease vs Car Loan for Tradies & Small Businesses

Businesses in the trade sector require commercial vehicles for daily operations. Whether it’s for a plumbing business to transport a team and equipment to each job, or for a larger fleet of delivery vehicles, it makes the most sense to have commercial cars, rather than use personal vehicles.

So - which is better, a car lease vs a car loan?

Ultimately, it will come down to how often the vehicle is needed, how much money can be paid off each month, and whether the goal is to own the car at the end of the loan term.

For commercial purposes, car leases and car loans each have their own benefits and drawbacks, which will influence which is most appropriate for each business.

What is a business car lease? 

A car lease for businesses involves entering into a contract with a financier or bank and temporarily leasing a vehicle for the agreed period (usually between 12 and 60 months).

The business pays for the vehicle in fixed monthly payments and there is an agreed capped number of kilometres that the car can drive per year. 

When the lease is coming to an end, the car will either be returned to the finance company, traded in for a newer model with a new lease contract, or the business can buy the car outright by paying off the residual amount in a lump sum payment.

What is a business car loan?

A commercial car loan is finance for a business to purchase a new or used vehicle - it works just like a regular car loan. The repayment terms and interest rates are agreed in a contract.

After the car loan period is over and the final payment is made, ownership of the vehicle is transferred to the business. Making extra payments or higher monthly sums will pay off the loan faster and reduce overall interest. 

There are different loan types available for businesses buying vehicles, including secured loans, unsecured loans, fixed-rate loans, low-document loans, and refinancing. Unlike personal car loans, businesses can get tax deductions for car finance.

Business car lease pros and cons

Pros of car lease 

• No high upfront cost: When you lease a car for business, you don’t need to pay a high upfront cost or a deposit as the cost of leasing is spread across monthly payments.
• Fixed monthly payments: The cost of leasing is generally lower per month compared to loaning a vehicle. Your monthly payments are fixed regardless of inflation, and finance companies often include servicing, maintenance, repairs, and roadside assistance costs in your monthly payments so you’re covered in an emergency.
• Newest car models: Leasing a vehicle usually means you’ll be driving a brand-new car, so you’ll cut costs on repairs and maintenance and be less likely to break down.
• Upgrade options: Leasing a vehicle provides the opportunity to upgrade your car, ute, or van to a newer model every few years.
• Tax advantages: Businesses will be able to claim leasing costs as a tax deduction if the car is used purely for business.

Cons of car lease

• Kilometres capped: The lease agreement caps the maximum number of kilometres that can be driven each year, which may not be ideal for fleets that require a lot of driving every day. Going over the cap will mean paying additional fees to the lender.
• Modification restrictions: Most leasing companies prohibit any modifications to the vehicle, including roof racks, an aftermarket canopy, or tinted windows. The car needs to be returned in the same condition it was provided in, otherwise there are financial penalties involved.
• No ownership at the end: Unless you choose to keep the car and pay off the vehicle’s residual value at the end of your lease agreement, the car is just temporary and you will have no long term ownership.
• Cancellation fee for ending lease early: Ending your lease contract before the agreed period will result in a cancellation fee, which can be equal to the residual value.

Car loan pros and cons           

Pros of car loan

• Ownership at the end of the agreement: Once you’ve paid off the loan, you will be the official owner of the vehicle.
• No limitations on mileage or alterations: There are no restrictions on modifying your vehicle or how much you can drive it.
• Tax deduction: Business car loans may make you eligible for tax deductions on the depreciation of the vehicle and interest paid.
• Lower cancellation fees: Ending a loan agreement early will incur fees but they are typically less than ending a car lease.
• Longer use: Unlike leasing a car, the length of your car loan agreement isn’t set in stone, and you can continue to finance the car for as long as you like/until it’s paid off.

Cons of car loan 

• Higher payments: The upfront cost of loaning a vehicle could be around 10% to 20% of the car’s value, and you may be paying higher monthly payments because you are paying off the full value of the car plus interest.
• Maintenance & repairs: The longer you keep your vehicle and the older it gets, the more at risk it is wear and tear and higher maintenance and repair costs.
• Depreciation: The vehicle will lose value as over time and usually depreciates at an average of 25% each year, so there’s a chance you won’t get back what you have paid if you have to resell. 

Car lease vs car loan: Which is best for tradies & small businesses? 

If you’re still unsure about whether a car lease or car loan is best for your small business, working with a finance broker will answer your specific questions.

Before U Loan’s finance and mortgage brokers can provide you with the expert guidance and resources to help you find the best product for your specific circumstances, the right lender, and type of loan type which will allow your business to thrive.

Contact us using the enquiry form or email info@beforeuloan.com.