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When it comes to financing a vehicle, you have several options available, each with its own set of benefits and considerations. Two of the most popular consumer car finance options are novated leases and car loans, so it’s important to understand how they work and what their advantages are before you apply.
Fortunately, you can do just that with Savvy. So, is it better to take out a novated lease or buy your car outright? Learn about the ins and outs of each finance type right here with us today!
The pros and cons of novated leases
Pros:
- Salary sacrificing and tax savings: you pay for your novated lease from your pre-tax earnings, so your taxable income is reduced. This means that opting for a novated lease can help you save on income tax each year until the end of your term.
- GST-free car buying: additionally, the GST charged on the vehicle purchase is claimable, so you can enjoy further cost savings through your novated lease.
- Fully maintained options: if you opt for a fully maintained novated lease, you’ll have a wide range of on-road costs, including servicing, insurance and fuel, included in your package. These costs will also come out of your pre-tax salary, saving more money in the process.
- Reduced payment cost: in many cases, the repayments for your novated lease may be lower than for a car loan. This is in part due to the residual payment at the end of your term.
- Convenient management: because your payments are being made by your employer to the lease provider, you won’t have to worry about remembering to keep up with your instalments.
Cons:
- Only available if your work offers them: unlike car loans, you can’t pick and choose the best novated lease. You’re restricted by the company your employer has chosen. If they don’t offer this arrangement, you won’t be able to choose it.
- Dealing with the residual: although you have plenty of options for how to do so, paying the lump sum residual at the end of your lease isn’t always easy to manage, especially if you wish to keep your car.
- Liable for Fringe Benefits Tax (FBT): novated leases are considered a fringe benefit, meaning your employer will be charged the FBT (unless you novate an EV or PHEV). This is usually passed onto you, which could increase your cost, but the Employee Contribution Method (ECM) exists to allow you to reduce your FBT liability through post-tax payments.
- No ownership until end of lease: the car is owned by your leasing company until you make the final residual payment. This means there are restrictions on modifications you can make to the car during your term.
The pros and cons of car loans
Pros:
- Ownership from the outset: with a car loan, you’ll be the owner of the vehicle from the date of purchase, rather than having your lender own it until the final payment is made.
- Ability to offset loan amount: you’ll have the freedom to make an upfront deposit, trade in your current vehicle or add/adjust a balloon payment, which reduces your monthly repayments and can save you money overall (in the case of deposits and trade-ins).
- Flexible repayment terms: car loans generally enable you to stretch out the repayment of your debt up to a maximum of seven years, while novated leases are capped at five (unless you refinance your residual and extend your lease).
- Wider variety of car options: while you may be restricted to vehicles no older than 12 to 15 years at the end of your novated lease term, there are specialist car finance providers who may be able to help you buy car up to 20 years or older.
- Simple structure: car loans are only between you and your lender, meaning switching jobs or other employment changes won’t have an impact once you’ve been approved.
Cons:
- No tax benefits: consumer car loans don’t offer any tax benefits to borrowers. However, if you purchase a car for your business using a chattel mortgage, you can claim for interest, GST and vehicle depreciation.
- Organising on-road costs: you won’t be able to have your car’s on-road costs sorted for you under a loan agreement, meaning you’ll have to organise and manage them yourself. Some lenders may be willing to cover their cost in your loan sum, though.
- Risk of repossession: if you default on your car loan payments, you’re at risk of having your car repossessed by your lender to recoup their losses, as car loans are a form of secured finance. This risk may also be present with novated leases.
- Car depreciation: the value of cars can fall at a rapid rate throughout your time owning one, so much so that it can fall below the outstanding balance of your loan. This can make things difficult if you’re looking to sell your car before the end of your loan.
Loan and lease instalments: novated leases vs car loans
Novated lease payments are made by your employer to your leasing company from your pre-tax income. This means that the money is taken directly from your payslip before it’s sent to you. As a result, you don’t have to worry about setting up a direct debit or reminding yourself to pay your provider each week, fortnight or month.
In contrast, there are only two parties involved in a car loan: you and your lender. You’ll pay your instalments directly to your lender based on your repayment schedule until your loan balance reaches $0.
Both finance types may allow you to pay them off early, but you’ll likely be charged fees for doing so. However, some car financiers allow free additional payments across your term and no early settlement fees, but it’s important to note that this isn’t the case for most lenders.
Residuals: novated leases vs car loans
At the end of every novated lease is a residual value, also known as a balloon or residual payment. The value is determined based on your car’s projected value at the end of your lease and must adhere to the ATO’s mandatory minimum values, which are:
| Lease term | Residual value |
|---|---|
|
12 months |
65.63% |
|
24 months |
56.25% |
|
36 months |
46.88% |
|
48 months |
37.5% |
|
60 months |
28.13% |
You’re required to cover this as part of your agreement, which can be done in several different ways:
- Paying the residual in full through savings or another loan, buying the car outright
- Refinancing the residual value with your lease provider to extend your existing agreement and keep the same car
- Selling or trading in your car to cover the residual and starting a new lease agreement with a different car
- Selling or trading in your car to cover the residual and ending your lease agreement
When it comes to car loans, residual or balloon payments aren’t mandatory and can be adjusted to your liking. Adding a residual will decrease the cost of your monthly payments but increase the overall spend on your loan. This is because your loan debt will reduce to your residual value, rather than $0, increasing the interest you pay across your term.
For instance, a $50,000 car loan repaid over five years at 7.50% p.a. interest would cost $1,001.90 per month and $60,114 overall. If you added a 10% ($5,000) residual, your monthly repayments would fall to $932.96, but the total cost would increase to $60,977.
Tax: novated leases vs car loans
Perhaps the biggest, most notable difference between novated leases and car loans is the tax benefits you gain from the former. Having your lease payments come from your pre-tax income means your taxable income is reduced, which in turn cuts down the income tax you’re liable to pay. If you’re looking solely at your tax situation, it’s often better to go for a novated lease than buying your car outright.
As an example, let’s say you’re earning $60,000 and wish to finance a car. Your novated lease and car loan options cost the same amount per month ($1,000), but your lease can improve your tax position. This is how each may impact your income tax (with tax information correct for the 2024-25 financial year:
| Pre-tax salary | Monthly payment | Taxable salary | Total tax payable | |
|---|---|---|---|---|
|
Novated lease |
$60,000 |
$1,000 |
$48,000 |
$5,188 |
|
Car loan |
$60,000 |
$1,000 |
$60,000 |
$8,788 |
It’s important to weigh up which option is most cost-effective for you. For instance, while car loans don’t reduce your income tax, finding a deal which offers substantial savings over your novated lease in terms of monthly and overall cost may outweigh the tax benefits you would otherwise have enjoyed.
Interest, fees and on-road costs: novated leases vs car loans
Interest and fees are the areas most similar between the two finance types. Car loans and novated leases conduct credit checks, resulting in your interest rate being largely informed by factors like your credit score, employment history, whether you’re asset-backed (such as owning a home) and the stability of your finances, as well as the provider themselves. Fees are also similar, with both finance options typically charging ongoing monthly service fees in addition to initial establishment fees.
Where the two differ is in terms of on-road costs. You have the option to include these in your fully maintained lease payments, so you don’t have to organise them yourself. Some of the costs you can include in your lease are:
- Comprehensive car insurance
- CTP insurance
- Servicing costs
- Repairs
- Petrol or charging costs
- Vehicle registration
These costs are all also taken out of your pre-tax salary and come with claimable GST, saving you further money on income tax in the process.
You may opt for a non-maintained lease, where you organise all of these yourself. While less convenient, it allows you to shop around and compare insurance and repair options, for example. This is also the case for car loans, as you’ll have to organise these yourself (although you can apply to have the costs covered by your loan with some lenders).
Availability and freedom to compare: novated leases vs car loans
One of the main drawbacks of novated leasing is that its availability is tied to your employment. Whether you can take out the lease you’re looking for is dependent on whether your employer offers it and if you qualify (you must be a salaried employee to take out a novated lease).
Even if your employer does offer them, you’ll be restricted to their choice of lease provider, meaning you may not be able to access the most competitive deals on the market.
The ease with which you can compare car loans is one of their great strengths when considering your finance options, according to Savvy Managing Director Bill Tsouvalas.
“Comparing car loans online has never been easier than it is today”, he said.
“With so many banks, credit unions and online lenders operating in the market, this provides prospective borrowers with a great platform to find the best available deal for their needs and maximise their savings.
“You could secure meaningful savings on your finance deal simply by taking the time to compare pre-approvals from different lenders side-by-side or by going through a car finance broker with a wide panel of partnered lenders, which unfortunately isn’t really possible with novated leasing.”
Usage: novated leases vs car loans
Both car loans and novated leases can be used 100% for personal purposes, setting them apart from commercial finance arrangements such as chattel mortgages and car leases. However, the amount you can drive on a novated lease is partly dictated by the terms of your agreement.
When you sign up for your lease, you’ll be asked to specify the amount you expect to drive per year. This helps your lease provider gain an idea of how much your running costs will be, as well as determine the value of your residual. If you drive more than the amount specified on your agreement, you may be charged a fee.
There are no such restrictions on car loans, with ownership being handed over at the start of the loan enabling borrowers to use their vehicle as much or as little as possible throughout their term.
Whether you decide to take out a novated lease or buy your car outright, you can enquire about a wide range of car finance options through Savvy today.
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This guide provides general information and does not consider your individual needs, finances or objectives. We do not make any recommendation or suggestion about which product is best for you based on your specific situation and we do not compare all companies in the market, or all products offered by all companies. It’s always important to consider whether professional financial, legal or taxation advice is appropriate for you before choosing or purchasing a financial product.
The content on our website is produced by experts in the field of finance and reviewed as part of our editorial guidelines. We endeavour to keep all information across our site updated with accurate information.
Approval for car loans is always subject to our lender’s terms, conditions and qualification criteria. Lenders will undertake a credit check in line with responsible lending obligations to help determine whether you’re in a position to take on the loan you’re applying for.
The interest rate, comparison rate, fees and monthly repayments will depend on factors specific to your profile, such as your financial situation, as well others, such as the loan’s size and your chosen repayment term. Costs such as broker fees, redraw fees or early repayment fees, and cost savings such as fee waivers, aren’t included in the comparison rate but may influence the cost of the loan. Different terms, fees or other loan amounts may result in a different comparison rate.
