Novated Lease Vs Car Loan

What’s the best option? Novated lease Vs car loan is all about what you need from your car finance – and this is why.

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, updated on June 29th, 2023       

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Novated Lease Vs Car Loan

Novated Lease Vs Car Loan – the Difference

The first thing to remember when comparing a novated lease and a car loan is that they’re two very different options. Despite the fact that most elements of the finance appear to be very similar, there are marked differences. On the one hand, both feature regular repayments and the chance to include a residual or balloon amount at the end of the term. Either option is also fine for 100% personal use – even though a novated lease is a three-way deal between you, a lender, and your employer. With a car loan, however, you own the vehicle from day one, whereas with a lease, you get ownership when the term ends and you pay the residual. You repay a car loan with after-tax earnings and a novated lease from pre-tax pay.

Choosing Your Best Car Finance Option Via Savvy

First up, you can only access novated lease car finance if your employer offers salary sacrificing. For many, that’s going to be the only consideration in terms of Novated lease Vs car loan. However, if you have both options, novated lease Vs car loan is an important comparison to make. It’s essential to compare the two and examine the benefits of both before you commit. Savvy partners with many different types of car finance lenders, from niche salary sacrificing vehicle lease providers to traditional car loan and chattel mortgage financiers. We’ve an option for every Australian car buyer out there, whether that’s a car loan, a finance lease, or a salary packaging deal, and this page should help you decide what’s best.

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Novated Lease Vs Car Loan – the Pros and Cons

Pros and cons of a Novated Lease

PROS

Salary Packaging and Tax Savings:

You pay for a novated lease car from your pre-tax earnings, so your taxable income gets lower. The more you spend on a vehicle, the less tax you’ll owe each year.

Fully Maintained Options:

Fully maintained novated leases have three main benefits. Firstly, they take a lot of the stress out of running a car because the salary packaging company sources everything from servicing and maintenance to fuel, breakdown cover, and insurance. Secondly, you benefit from the lease provider’s considerable buying power because they buy and maintain thousands of cars annually. Thirdly, you get to reduce your taxable income further, because all the above gets deducted from your pre-tax pay – and bundled in with your finance costs, which makes for one convenient, monthly payment.

GST-free Car Buying:

You get to choose the make, model, and optional extras for the car you’ll drive, but when a novated lease lender buys it, they claim back all of the GST on the purchase price – so you pay the ex-GST rate for the vehicle. Novated leasing is the only way a private buyer can get a GST-free car in Australia. On a $60,000 car, for example, that’s an instant saving of almost $5,500.

Flexible Terms and Attractive Interest Rates:

Novated leases run for between two and five years. Because of the terms and conditions of the lease, and due to the fact the lender retains ownership until you pay off the residual, lending is relatively low-risk, and interest rates remain low.

CONS

You Don’t Own the Car Until the Lease Term Ends:

Especially with fully maintained novated leases, there are some restrictions. For instance, you’ll need to fill up with fuel at a servo chain your salary packaging company deals with.

You Can’t Adjust the Residual Amount:

The ATO specifies residual amounts for novated lease cars, based on depreciation during the term. While that’s great for maintaining an accurate resale value and insuring against negative equity, it means there’s little scope to adjust regular payments.

You’ll become liable for Fringe Benefits Tax (FBT):

FBT applies to any bonus or incentive your employer forwards to you that is worth money or saves you money. Novated leases occupy that bracket, but the good news is the rate gets capped at 20% - and it’s even lower if you work in some specific professions. You can use the employee contribution method to offset potential losses through FBT. That entails paying some of the running costs from after-tax earnings – and you can pick and choose which ones to make the best of your salary packaging finance. Novated leases provide significant cost and tax benefits, so FBT doesn’t have a hugely negative effect.

Your Tax Return Gets Complicated:

One aspect to consider when looking at novated lease Vs car loan is tax time. You’ll likely need a tax agent or accountant to complete your annual tax returns once you sign up for a novated lease. That’s because FBT is a factor and that’s connected to the specifics of your lease terms. It also gets tricky if you’re offsetting some running costs against tax with a fully maintained deal, but not others.

Pros and cons of a Car Loan

PROS

Use a Cash Deposit or Trade-in:

If you’ve been saving up or have a car to trade, car loans allow you to reduce repayments by putting up a deposit or trade-in. It’s worth noting here that you can use a trade-in with novated leases too.

You Can Buy Older Cars with a Car Loan:

Savvy partners with car loan lenders that consider older vehicles. Different providers specify various limits – and all get based on the car’s age at the end of the finance term. However, some lenders accept vehicles up to twenty-five years old, whereas novated leasing is exclusively for late-model and brand-new cars.

You Can Adjust the Balloon Payment:

Unlike with a novated lease, you can adjust a car loan balloon repayment to manipulate the size of the monthly cost. Raising the balloon amount means lower payments, lowering it drives repayments up. It’s worth a word of caution here. Although this feature is attractive, it’s best to stick to realistic balloon amounts so that you don’t end up owing significantly more on the car than it’s worth when the term ends.

Flexible Terms and Attractive Interest Rates:

This is one of the areas where car loans trump novated leases because they can run up to seven years. Car loans get secured against the vehicle you buy, so they’re relatively low-risk for providers and have attractive interest rates as a result of that.

CONS

No Tax-deductible Element:

Novated lease Vs car loan has got a lot to do with tax. Car loans are personal finance products, so private buyers can’t claim back any of the costs when it comes to their tax return. The tax-saving benefits of a novated lease, similarly, aren’t related to claiming expenses – rather, you save on GST at the point of sale and income tax as you repay.

No GST Savings:

Again, you won’t be able to claim any of the GST on the purchase price if you’re a private buyer. However, if you’re self-employed or own a business, a chattel mortgage works much like a car loan, but it’s a commercial finance product, so some costs are tax-deductible. If you’re registered, chattel mortgages also come with GST benefits.

Novated leasing vs car loan explained

Novated Lease Vs Car Loan – Your Annual Take-home Pay

It’s time to see what novated lease Vs car loan looks like in real everyday terms. Let’s say you have two car finance deals in front of you, and you’re wondering which one to sign. You’re in a full-time job, and you earn $50,000 per annum. Your employer offers salary sacrificing.

One option is a novated lease, the other a car loan, but both finance packages are for the same car – it’s a Volkswagen Touareg, which costs $81,990. Both deals also feature a five-year term with an interest rate of 6%. We’ll use the ATO-recommended residual/balloon amount for both finance options – which gets set at 28% – governed by the fact this is a 60-month finance term.

Finance Tax Bracket Tax Rate Monthly Payments Tax Bill Annual Take-home Disposable Income
Novated lease
18,201-45,000
19%
$1,142
$3,438
$32,858
$32,858
Car Loan
45,001-120,000
32.5%
$1,256
$6,717
$43,283
$28,211

The GST and Tax Benefits of a Novated Lease

  • Choosing the novated lease option means you immediately save more than $7,400 in GST.
  • You also repay from pre-tax earnings, so you start your car finance journey from the lower of the two tax brackets in the table and pay just 19% instead of 32.5%.
  • Your repayments are lower because you’re paying an ex-GST price for the vehicle.
  • During the course of each year the lease runs, you save $4,647, even though the car, interest rates, and residual for both of the above after-tax pay outcomes are identical.
  • Choosing a fully maintained novated lease would mean an even lower taxable income.

Residuals for Novated Lease Vs Car Loan Balloon Payments

Balloon payments and residuals both sit at the end of a finance term. They become due only when the agreement finishes, so you don’t pay finance down to zero balance during the term when either is present. With both car loans and novated leases, when the agreement ends, you get three options. You can choose to refinance the residual or balloon and keep paying off the financed amount, pay the residual off and own the car with a clear title, or sell your vehicle and start a new finance term. However, that’s where the similarities between the two end.

  • Car loan balloon payments can be manipulated by the borrower to adjust the regular repayment amount – so you can include a higher balloon amount and have lower repayments, or vice versa. Balloons apply to car loans and forms of finance where a borrower owns the car from the start of a finance agreement – like a chattel mortgage, for instance.
  • Novated lease residual amounts are governed by ATO guidelines, based on the depreciation of a vehicle during the finance term, so they can’t be adjusted significantly. They’re represented as a percentage of the car’s value at the point of sale. Novated car leases always feature a residual amount, and never a balloon payment.

Is a car loan a good way to buy a vehicle?

It’s a great way to finance the purchase of a vehicle when you don’t have, or don’t want to pay the full asking price up front, and that’s why thousands of Australians choose a car loan. Borrowing gets secured against the vehicle, meaning interest rates stay relatively low and that makes car loans pretty cost-effective. However, if your employer allows salary sacrificing, car loans just can’t compete with novated leasing.

It’s like this. Novated lease Vs Car loan is a bad match-up. Novated leases are the pinnacle of car finance for employees, and car loans can never compete with that. Mainly because salary sacrificing is an ATO-sanctioned way of using buying a car to reduce income tax, but also because of the fact it’s the only way a private buyer can ever purchase a vehicle GST-free.

What are the main features of a car loan?

Car loans are designed for consumers, and they’re a cost-effective solution to buying a late-model or new car. Car loans are straightforward and easy to understand. You pay fixed-rate, regular payments that don’t change throughout the agreement term. You own the vehicle from the second you sign up, but the lender registers an interest until your payments are complete, when you get the full title:

  • Terms between one and seven years
  • Secured finance which features fixed payments with relatively low interest rates
  • Use a deposit or trade-in, or borrow 100% of the vehicle cost
  • Choose to use a balloon payment, or pay down the loan to zero
  • Own the car from day one, which means you can modify it
  • If you fancy a change during the term, you’re free to sell the car and switch to a new one with ease

What are the main features of a novated lease?

Novated lease Vs car loan, purely based on cost, is most relevant when looking at employment status. Do you have access to salary sacrificing? If so, then it’s always going to be cheaper to get a novated lease. If your employer doesn’t offer the option, however, then a car loan makes perfect financial sense.

The main benefits of a novated lease are connected with tax and GST. In a nutshell, you pay for the car before you pay tax, and you don’t pay GST. However, they’re not the sole benefits of a novated lease:

  • Opt for fully maintained and bundle all or some of the running costs like fuel, servicing, insurance, and maintenance into your monthly pre-tax payment
  • Choose any car and pick a term between two and five years
  • Pay zero GST on your new vehicle
  • Get the benefit of the lender’s buying power on the purchase price, fuel, and maintenance
  • Pay far less income tax while the lease is running
  • Choose to buy the car when the lease term ends, refinance the residual, or sell the car and drive the latest model

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