Leasing

Leasing is another type of finance that may suit people who regularly trade-in their car. In a lease arrangement, the ownership of the car stays with the lessor or lender and the car is returned at the end of the lease term. You can terminate the lease early by returning the car but there is a cost involved and this should be explained in the contract. During the term of the lease, you are responsible for making the lease repayments and for all the car's running costs.

How a lease works

When you lease a car the payments are based on the difference between the car's sale price and what the car is estimated to be worth at the end of the lease (its residual value).

An example is a car whose sale price is $25,000. The term of the lease is 5 years and the interest rate is 14% pa. This equates to a loan of $37,133 that needs to be repaid. If the car is estimated as having a residual value of $7,500 it leaves an amount of $29,633 that you will need to repay over the 5 year term. In a normal personal loan situation you would be required to pay the entire $37,133 over this period of time. The residual value of the car is based on what the car is anticipated to be worth at the end of the lease.

Conditions apply

Be careful, some leases have conditions that base the residual value of the car on the distance that the car will travel and on its condition. If for some reason the car is not worth the estimated residual value at the end of the lease then you may have to make up the price difference. If you intend to buy a car on a lease agreement, make sure that you are aware of any conditions on the car such as mileage and its condition at the end of the lease period.