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When leasing, the person or organisation taking out the lease (the lessee) only pays for the use of the vehicle for a specified period and the organisation granting the lease (the lessor) remains the owner of the vehicle. Lease payments cover the difference between the vehicle's original value and its estimated value at lease-end (plus fees and interest). This change in value over time is called depreciation and the value of the vehicle at lease end is called its residual value.


A 36-month 50% residual on a new $20,000 car means that its estimated depreciated or residual value at the end of the lease will be $10,000. The actual value at the end of the three years might be higher or lower.


There are two types of leases – finance leases (more common for commercial leases) and operating leases. In finance leases, the lessee estimates the residual value at the start of the lease and if the actual value at lease end is lower, the lessee must pay the difference. With operating leases, the leasing company bears this risk but lease payments are consequently higher.

In novated leases, an employer takes lease payments, fringe benefits tax and running costs out of an employee’s salary before tax to reduce taxable income.

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