The pros and cons of leasing vs financing a car in New Zealand

Buying a car is a significant financial decision for many New Zealanders. You want to find something reliable that meets your needs and fits within your budget. If you’re in the market for a new car, but you don’t have the money to pay for it outright, or you want to spread the cost for cash flow purposes, you might be considering leasing or financing your vehicle.

Each can offer some flexibility depending on your lifestyle and budget. This guide will help you understand the pros and cons of car leasing versus financing your car purchase.

Understanding the difference: leasing vs. financing a car

There are a few key differences to understand when leasing or financing a vehicle.

Car financing

When you finance your vehicle purchase, you borrow the money to buy it through a car loan. You own the car from the beginning and then pay off the loan in a series of repayments. The lender will register an interest in the vehicle when you take out the loan; this will remain in place until the loan is repaid in full. If you default on your loan repayments, the lender may repossess the car and sell it to recover any outstanding debt, depending on the specific situation.

Car leasing

When you lease a car, you rent it for a fixed term and then return it, potentially upgrading to another vehicle, at the end of the lease period.

Key differences:

Ownership: When you lease a car, you do not own it. It’s yours to use temporarily. This means you’re paying for the use of the vehicle.

Flexibility: With a lease, you commit to ‘renting’ a vehicle for a period of time. But at the end of that, it’s up to you whether you want to lease it again, move to a new vehicle or opt for something different

Making changes: When you lease a car, you generally can’t make any alterations to it. If you’ve taken out a loan to buy it, though, you can usually do what you like as long as it doesn’t affect the car’s value or ability to get insurance.

Mileage: In some cases, mileage limits apply to leased vehicles, which may limit your use of the vehicle. This will not be the case with a financed car.

Costs: Lease costs will continue for the duration of your lease, while finance costs will end when the loan is paid off. It is common for leased vehicles to be higher-end models, so a lease may not be significantly cheaper than the equivalent car loan payments.

Leasing a car in New Zealand

Pros of leasing a car in New Zealand

There are some reasons that people may choose to lease a car.

Lower monthly payments: While people often lease more expensive cars than they would buy outright, lease payments are often lower than those for the same model financed through a loan. So, like-for-like, leasing typically means lower monthly payments.

Newer cars more often: You can usually upgrade your leased vehicle to a new model every few years relatively easily.

Reduced maintenance costs: Some leases include servicing and warranty coverage, which can lower vehicle operating costs.

Tax benefits for a business: If you own a business, you may be able to claim your lease payments as expenses against your income, reducing your potential tax bill.

Cons of leasing a car

There are also drawbacks that may make leasing the wrong option.

No ownership: When you lease a car, you don’t own it. You’re not building any equity in the vehicle with your payments, and you’ll need to keep making them as long as you want to keep the vehicle.

Mileage restrictions: You may have limits on the total number of kilometres you can travel in a year or during the lease term, without incurring extra charges.

Wear-and-tear penalties: Depending on your lease agreement, you may be charged for damage to the vehicle, even if it is only scratches.

Long-term costs: Over time, leasing multiple cars may be more expensive than owning them outright. If you think your circumstances may change in the future, and it could be hard to service a lease, it’s worth considering how you would cope.

Flexibility first: Leasing a car could be a suitable option for people who highly value flexibility. If that’s not a priority for you, it may not make as much sense.

Financing a car in New Zealand

Pros of financing a car in New Zealand

On the other hand, there are many reasons why taking out a car loan may be a good option.

Ownership at the end: Once the loan is repaid, the car is yours. You can stop making payments at this point and enjoy the use of yourvehicle.

Unlimited use: There’s no restriction on how far you can drive a car that you own with a loan. (Although there may be limits on some types of associated insurance covers, such as mechanical breakdown cover.)

Customisation freedom: You can modify your vehicle as long as it retains its value and remains secure for a loan. You may also be able to sell it and pay off your loan early, though it’s important to check for any fees that may apply to early repayment.

Better long-term value: When you sell, you can usually recover some of the vehicle's cost.

Cons of financing a car

Bear in mind some of these factors as you make your decision.

Higher monthly payments: When comparing leasing and financing the same vehicle, financing may have higher monthly payments.

Depreciation risk: Your car will lose value the moment you drive it away. When you’re leasing, this isn’t your concern, but when you’re financing, it means your asset has depreciated. You may end up owing more than the car is worth for a while.

Maintenance: As the owner of the car, you are responsible for covering repairs and maintenance after the warranty expires.

Interest costs: You’ll pay interest on the initial amount borrowed for your vehicle, which can increase your total cost.

Choosing what’s right for you

What Kiwi drivers should consider?

Tax deductibility: 100 percent of a lease payment is tax-deductible if the car is leased by a business. If you buy the car for business use, you can claim any GST, but only the interest portion of the repayment as an expense.

Insurance and registration: When you’re budgeting for your new vehicle, you’ll need to consider how you'll cover insurance and other ownership costs, such as registration and warrants of fitness.

Consider other options: If you’re considering an electric or hybrid vehicle, you may be eligible for lower-cost “green” loans, which could be appealing.

Drive smarter with better finance™

Whether you want the flexibility of a lease or the security of a fixed-term finance agreement for a car loan, it’s important to weigh up the options and find the right solution for you. The team at better finance™ is here to help with any questions you might have about any aspect of borrowing to purchase a car. Get in touch with us today.