Should you buy or lease a car?

If your current car is close to the end of its life, the next question is how to pay for the one that replaces it. You can buy it outright or with a car loan, or you can lease it. Neither choice is right for everyone. Whether you should buy or lease a car depends on how you use it, how long you plan to keep it, whether your employer offers salary packaging, and how much you care about owning the car at the end. This guide explains how the main types of lease work in Australia, what each one costs over its term, and the situations where buying is the better deal.

How leasing a car works

A lease gives you the use of a car for a set term in return for regular payments, while a finance company holds the vehicle. Businesses have several options. The Commonwealth Bank says a finance lease can suit business owners who want to use a vehicle without owning it, while hire purchase gives immediate use of a vehicle while paying it off over a fixed term ⁶. Under finance and operating leases, rental payments may be tax deductible, depending on the business's circumstances ⁶.

For most private drivers, though, the lease on offer is a novated lease through their employer. That is the type the rest of this guide covers in most detail.

What a novated lease is

A novated lease is a three-way agreement between the employee who drives the car, the lessor, which is usually a finance company, and a third party, the employer ¹. The Commonwealth Bank describes it as a way you can finance a new or used car, paying for it from your pre-tax salary under a salary sacrifice arrangement with your employer ⁴.

The employer reduces your salary by the cost of the car, which lowers the income you pay tax on ¹. Running costs can be included too. Canstar notes that running costs such as fuel and servicing can also come out of your pre-tax salary ², and the Commonwealth Bank says some leases package costs such as registration and insurance into the repayments ⁴. The result is one regular deduction in place of a string of separate bills.

Fringe benefits tax

A car provided this way is a fringe benefit. Employers must pay fringe benefits tax (FBT) on the value of these benefits ¹, and lease providers usually structure part of each payment from your after-tax pay to reduce that bill. The split between pre-tax and after-tax deductions is one of the details to check in any quote.

The residual payment at the end of a lease

Every lease is priced around a residual value, the amount the car is assumed to be worth when the term ends. Canstar explains that when you are leasing a car, the residual value is what the car is worth at the end of the lease term, and the amount you pay to buy the car at that point is often called the balloon payment ³.

For novated leases, the Australian Taxation Office sets minimum residual values based on an eight-year effective life ³. As published in Canstar's guide to residual values, the minimums are:

after one year: 65.63% of the car's cost ³
after two years: 56.25% ³
after three years: 46.88% ³
after four years: 37.5% ³
after five years: 28.13% ³

Canstar's worked example is a $50,000 car on a three-year term, which carries a residual of $23,440 ³. That is a large sum to find at the end of the lease if you want to keep the car. If you do not buy it, you may be able to trade it in for a new novated lease, or refinance the residual ³. Some contracts also require you to make good any shortfall if the car is worth less than the residual when you hand it back ¹.

When leasing makes sense

Leasing suits some drivers well. It tends to make the most sense when:

your employer offers salary packaging, so the payments come out of pre-tax pay and reduce your taxable income ⁴
you like the convenience of one regular deduction that covers the car and its running costs ²
you prefer a newer car every few years and are happy to start a fresh lease at the end of each term ³
you want an electric car and your arrangement qualifies for the FBT exemption described below

Electric cars and the FBT exemption

Since 2022, employers have been exempt from FBT when they provide an eligible electric car through a lease of this kind, following amendments to the Fringe Benefits Tax Assessment Act 1986 ¹. To qualify, the car must be a zero or low emissions vehicle, which means a battery electric vehicle or a hydrogen fuel cell vehicle ². Plug-in hybrids were exempt until 1 April 2025 and are no longer eligible for new arrangements ².

The car's price matters too. BDO gives $91,387 as the luxury car tax threshold for fuel-efficient vehicles in the 2025-26 FBT year, which caps the exemption ⁵. The 2026 Federal Budget announced that the full exemption will be wound back, as BDO's Budget analysis sets out ⁵:

A new compact hatchback parked in the driveway of a suburban Australian home in soft morning light (AI-generated image) — AI-generated image

from 1 April 2027 to 31 March 2029, the full exemption will only apply to electric cars costing up to $75,000, with a 25% discount for those above $75,000 and up to the threshold ⁵
for FBT years from 1 April 2029, only the 25% discount may apply ⁵

The Treasurer and the Climate Change and Energy Minister said the changes would not affect existing arrangements, but BDO's analysis notes that these are Budget measures and recommends waiting for further detail ⁵. If an electric car lease is part of your plan, check the rules that apply on the day you sign.

When buying is better than leasing

Buying is often the cheaper and simpler choice. These are the situations where it usually comes out ahead.

You plan to keep the car for a long time

Once a car loan is paid off, the car is yours and the repayments stop. A lease never really reaches that point unless you pay the balloon, and if you then keep the car, the total of the lease payments plus the residual can be more than you would have paid on a loan. If you tend to keep a car for eight or ten years, ownership usually suits you better.

Your job is not settled

A novated lease follows your employment. If you leave your job, the novation is cancelled and the employer's obligations revert to you; the lease can then be novated to a new employer ¹. The Commonwealth Bank warns that if you change jobs or stop working, the responsibility for making the repayments remains with you, and they may no longer be pre-tax ⁴. If your new employer does not allow salary sacrifice, the lease is typically turned into a standard car loan ². If your work is insecure or you expect to move on, that risk is worth weighing.

You want to choose, modify or drive the car without limits

When you own the car, you choose any make and model you can afford, fit the accessories you want, and drive it as far as you like. A lease contract can set terms on how the car is used and returned. Check the contract's limits on kilometres and wear before you sign, and price in a long road trip, such as towing a van with one of the best cars for towing a caravan, if you plan one.

You do not pay much income tax

The tax benefit of a novated lease comes from reducing the salary you pay tax on ². If your income is modest or you are not an employee at all, that benefit shrinks. A simple car loan may then cost less over the same term.

Questions to ask before you sign either deal

Whichever way you lean, compare like with like. Put the total cost of each option over the same period side by side. Include every fee and charge, plus the residual or the car's likely resale value at the end.

What is the total of all payments over the term, and what is the residual?
Which running costs are included, and what happens to any unspent budget at the end of each year?
What happens if you change jobs, stop working, or want to end the lease early? ⁴
Are there limits on kilometres, wear, modifications or who can drive the car?
Can you buy the car at the end, and can you refinance the balloon if you need to? ³

The Commonwealth Bank suggests getting help from an accountant or financial adviser to understand how a novated lease affects your own finances ⁴. That is sound advice for any finance deal on a car.

Deciding whether to buy or lease a car

If you decide to buy, start by setting a budget. Our car loan calculator shows what the repayments on a loan could look like at different rates and terms, so you can compare them with a lease quote on the same car. Reliability matters too, because a car you keep for years needs to stay out of the workshop: our guide to the most and least reliable car brands is a good place to begin, and our list of reliable hybrid cars covers lower running costs.

When you are ready to look, browse the cars on Car Domain, and read our safety guide for buyers before you meet a private seller or hand over a deposit. The right finance choice is the one that fits how you drive, how long you keep a car and how secure your income is. For many buyers that will still be ownership; for an employee with salary packaging and a taste for a new car every few years, a lease can make sense.