“Car lease” is one of the most searched phrases in Australian vehicle finance and one of the least precise. It is used for a salary-packaged novated lease, for a business finance lease, for a fleet-style operating lease, and for consumer leasing products that are closer to long-term rental than to finance. Each of those is a different contract with a different owner, a different end and a different person it is built for. This page explains the four, how they differ from simply borrowing to buy, and which of them Alpha390 can actually arrange, so you can work out which conversation you need to have.
If you already know you want a novated lease, the detail lives on our novated lease page. If you are a business weighing a lease against owning the vehicle outright, the alternatives are covered under chattel mortgage and commercial hire purchase.
What a lease is, and what it is not
In every form of leasing, someone other than the driver owns the vehicle for the life of the agreement. The driver pays for the use of it. That is the single idea that separates leasing from a car loan: with a loan you borrow money and buy the car, so it is yours from day one and the lender holds security over it; with a lease the financier or lessor buys the car and you pay to use it, with ownership either transferring at the end, being offered at the end, or never transferring at all.
Everything else, from who can enter the arrangement to how the payments are treated, follows from which kind of lease it is.
The four car lease types in Australia
1. Novated lease
What it is. A three-way agreement between an employee, their employer and a financier. The employee chooses the car, the financier funds it, and the employer deducts the lease payments and often the running costs from the employee’s pay, part of it before tax. The lease is “novated” because the employer takes on the payment obligation for as long as the employee stays; if they leave, the obligation reverts to the employee. There is a residual value to deal with at the end of the term.
Who it is built for. Salaried employees whose employer offers salary packaging. It is not available to sole traders or company directors who do not draw a PAYG salary.
Can Alpha390 arrange it? Yes. Novated leases are one of the credit assistance services listed in our Credit Guide, arranged through our lender panel. The mechanics, the fringe benefits tax concept and the end-of-term options are set out on the novated lease page, and we have covered specific questions separately: how a novated lease works, residual value and end-of-term options, novated leases on used cars and novated lease vs car loan.
2. Finance lease
What it is. A business lease in which the financier owns the vehicle and the business leases it for a fixed term, taking on the risks and rewards of ownership in practice: maintenance, insurance and the residual value at the end. At the end of the term the business typically has to deal with the residual, either by paying it out, refinancing it or selling the vehicle to cover it.
Who it is built for. Businesses that want a vehicle on the balance sheet in substance without buying it outright at the start, and that are comfortable carrying the residual risk. It is a business product; the vehicle needs to be used predominantly for business purposes.
Can Alpha390 arrange it? A finance lease is not a product we currently publish. Our business vehicle work is structured as a chattel mortgage or a commercial hire purchase, which are the business vehicle structures we arrange. If a finance lease is specifically what you are after, tell us and we will let you know honestly whether it is available through our panel for your situation or whether one of those structures is the better fit.
3. Operating lease
What it is. A lease where the lessor keeps the ownership risk. The business pays a fixed amount for the use of the vehicle over the term, often with servicing, tyres and registration bundled in, and hands the vehicle back at the end with no residual to pay, subject to fair wear and tear and kilometre limits. This is the model most large fleets run on.
Who it is built for. Businesses that want predictable monthly costs, do not want the vehicle as an asset and plan to replace it on a cycle rather than keep it.
Can Alpha390 arrange it? An operating lease is not a product we currently publish either. Businesses running fleets on this basis usually deal with a fleet management company directly. If you are weighing an operating lease against owning a small number of vehicles, that is a conversation we can have, and our fleet finance page covers the ownership side.
4. Personal (consumer) car lease
What it is. A consumer lease is an agreement to rent a vehicle for a fixed term where the consumer does not have a right or obligation to buy it at the end. Consumer leases are regulated separately from consumer loans in Australia and are usually offered directly by leasing companies or through subscription-style services rather than by brokers.
Who it is built for. Private individuals who want use of a car for a set period without owning it and without a salary-packaging arrangement.
Can Alpha390 arrange it? No. We do not arrange consumer leases. If you are a private buyer, the products we can help with are consumer car loans, and if your employer offers salary packaging, a novated lease.
The four leases side by side
This table compares structure, not tax. How any of these is treated for income tax, GST or fringe benefits tax depends on the entity, the vehicle’s use and current law, and that is a question for your accountant rather than a table.
| Novated lease | Finance lease | Operating lease | Personal (consumer) lease | |
|---|---|---|---|---|
| Who can enter it | A PAYG employee whose employer offers it | A business (ABN) using the vehicle predominantly for business | A business, typically fleets | A private individual |
| Who owns the car during the term | The financier | The financier | The lessor | The lessor |
| Who pays | The employer, from the employee’s pay | The business | The business | The individual |
| Running costs | Usually packaged into the payment | Usually the business’s responsibility | Often bundled into the payment | Varies by product |
| What happens at the end | A residual is payable; pay it out, refinance it or trade the car | A residual is payable; pay it out, refinance or sell to cover it | Hand the car back, subject to wear and kilometre terms | Hand the car back; no right to buy |
| Ends up owning the car? | Can, by paying the residual | Can, by paying the residual | Not designed to | No |
| Change of job or circumstances | Obligation reverts to the employee if they leave | Business remains liable | Business remains liable | Individual remains liable |
| Alpha390 can arrange | Yes | Not currently published — ask us | Not currently published — ask us | No |
Lease or loan: how to decide
For most people the real decision is not between four lease types. It is between one lease type that fits their situation and a loan. A few questions settle it quickly:
- Are you a PAYG employee with salary packaging available? Then the comparison is novated lease versus a consumer car loan, and we have written that up in novated lease vs car loan.
- Are you a business owner or sole trader buying a work vehicle? Then a lease is one option among several, and for most small businesses the practical comparison is chattel mortgage versus hire purchase versus lease. Our chattel mortgage vs novated lease guide covers the case where you draw a salary from your own company.
- Do you want to own the car at the end? A loan gets you there directly. A novated or finance lease gets you there via a residual. An operating or consumer lease is not designed to get you there at all.
- Do you want to change cars every few years with no end-of-term decision? That points toward an operating-style arrangement, which for private buyers usually means a subscription or consumer lease provider rather than a broker.
Whichever way you lean, run the numbers before you decide. Our repayment calculator will show you what a loan of a given size looks like at a rate you enter, and the balloon payment calculator shows how a residual changes the shape of the repayments, which is the closest a loan calculator gets to a lease.
A note on tax
Every lease type attracts a different tax treatment, and it is the tax treatment that people are usually chasing when they ask about leasing. Novated leases interact with fringe benefits tax; business leases and chattel mortgages interact with GST credits, depreciation and deductibility in different ways. None of that is something a finance page should decide for you. Ask your accountant which structure suits your entity and your use of the vehicle, then come to us to arrange the finance that matches.
Questions to ask before you sign any lease
- Who owns the vehicle during the term, and who is responsible for insuring it?
- What is the residual or balloon at the end, how was it set, and what are my options when it falls due?
- What happens if my circumstances change: a change of job, a business closing, a vehicle written off?
- Are running costs included, and if so which ones, and what happens if actual costs are higher or lower?
- Are there kilometre limits or wear-and-tear standards, and what do they cost to exceed?
- What are the early termination terms?
- Which structure has my accountant actually recommended for my situation?
Frequently asked questions
What is the difference between a car lease and a car loan?
With a car loan you borrow money and buy the car, so you own it from the start and the lender holds it as security. With a lease the financier or lessor owns the car and you pay to use it for a fixed term. Whether you can own it at the end depends on the lease type: novated and finance leases carry a residual you can pay out; operating and consumer leases are designed to hand the car back.
Can I lease a car if I am self-employed?
Not on a novated lease, which requires a PAYG employer to deduct the payments. A self-employed person or company can use a business lease, but for most small businesses the structures actually written are a chattel mortgage or a commercial hire purchase. Alpha390 arranges both; a finance lease is not a product we currently publish, so ask us if that is specifically what you need.
Is a novated lease the same as a car lease?
A novated lease is one kind of car lease, specific to salaried employees whose employer offers salary packaging. When people search “car lease” they are often looking for a novated lease without knowing the term, but finance leases, operating leases and consumer leases are also car leases with quite different rules.
Does Alpha390 offer personal car leases?
No. We do not arrange consumer leases. For a private buyer the products we can help with are consumer car loans and, if your employer offers salary packaging, a novated lease.
What is a residual or balloon on a car lease?
The amount left owing at the end of a novated or finance lease, set at the start of the agreement. When the term ends you can generally pay it out and keep the car, refinance it, or sell or trade the car and use the proceeds. Operating and consumer leases are structured without a residual because you hand the car back.
Is leasing a car tax deductible?
It depends on the lease type, the entity and how the vehicle is used. Novated leases interact with fringe benefits tax; business leases interact with GST, depreciation and deductibility in different ways. This is general information only, and the right structure for tax purposes is a question for your accountant before you arrange the finance.
Which car lease is cheapest?
There is no single lease structure that is cheapest for everyone. The total cost depends on the vehicle price, the lease or finance structure, the term, fees, the residual or end payment, what running costs are bundled and your individual circumstances. Compare the total arrangement rather than one headline rate or repayment, and get tax advice where tax treatment matters.
Not sure which structure fits?
Tell us who you are, what you are buying and how it will be used, and we will tell you plainly which of these we can arrange for you and which you would be better placed to source elsewhere. We compare a panel of Australian lenders. We do not assess every lender in the market.
Apply online or send us a quick enquiry.
Written and reviewed by the Finance Director at Alpha390 Finance.
This article is general information only and does not constitute credit, financial or tax advice. It does not take your objectives, financial situation or needs into account; consider whether a product is appropriate for your circumstances and speak to your accountant about tax treatment before deciding. Alpha390 Finance operates under Australian Credit Licence 506065 (Five Tees Pty Ltd). Lending is subject to approval, lending criteria, terms, conditions and fees.
