Novated Lease vs Car Loan: Navigating Your Car Financing Options

Choosing the right financing option for a new or used car in Australia is a critical decision that impacts your finances over the long term, and one that will likely boil down to a novated lease vs a car loan. Whether you're considering a novated lease or a car loan on a new or used car, understanding the differences, benefits, and potential drawbacks of each can help you make an informed choice. This guide delves into the key aspects of novated leases and car loans, offering insights to aid your decision-making process and help you make the right choice when assessing car loan lenders.

What is a Novated Lease?

A novated lease is not merely a financial agreement but a tripartite arrangement that binds an employee, their employer, and a finance company into a unique vehicle (new or used) leasing setup. Under this arrangement, your employer deducts lease payments from your pre-tax salary, potentially offering significant income tax advantages.

This unique structure allows for a more tax-efficient method of car financing, directly impacting your take-home pay less severely than traditional financing methods might. Moreover, a fully maintained novated lease encompasses not only the lease of the car but also its running costs, including fuel, maintenance, and insurance, providing a comprehensive package that simplifies budgeting and vehicle management.

This consolidation into one regular payment facilitates easier financial planning and potentially lower monthly costs due to the tax savings involved.

What is a Car Loan?

In contrast, a car loan - or finance loan, as it is sometimes called - is a more straightforward and traditional approach to vehicle financing. It involves borrowing a specific amount of money to purchase a vehicle, and repaying this sum along with interest over a set period. It is possible to take out either a secured loan, with the vehicle itself serving as collateral, or an unsecured loan.

This financial tool grants immediate ownership of the vehicle, offering the freedom to modify, drive without mileage restrictions and sell the car as you see fit. The trade-off, however, comes in the form of typically higher monthly payments compared to leasing, as well as the responsibility for all associated running and maintenance costs.

Yet, for many, the appeal of outright ownership and the absence of end-of-term balloon payments make car loans a preferable option.

Benefits of a Novated Lease

There are several benefits to a novated lease that make them an appealing option for many individuals.

Tax Savings

The primary lure of a novated lease lies in its tax-saving benefits. By not paying GST on the vehicle’s purchase price and making lease payments from pre-tax salary (salary sacrificing), significant savings can be realised. This can lead to substantial reductions in the overall cost of acquiring and running a vehicle.

Extra Savings on EVs and PHEVs

Recent legislation has further sweetened the deal for novated leases by exempting electric vehicles and plug-in hybrid electric vehicles (up to the luxury car tax threshold) from fringe benefits tax (FBT). This allows every dollar spent on such cars under a novated lease to be pre-tax, enhancing affordability and promoting greener transportation options.

Bundled Car Running Costs

The convenience of consolidating all vehicle-related expenses into one regular payment is another compelling reason for choosing a novated lease. This not only simplifies budgeting but also extends the GST-free status to running costs, potentially saving thousands annually.

Personal Use and Vehicle Flexibility

Novated leases debunk the myth that such arrangements are exclusively for business-related vehicle use. They allow for 100% personal use and offer flexibility in the choice of vehicle, including used cars and the addition of accessories.

Fleet Discounts and End-of-Lease Options

Leverage on fleet discounts due to bulk buying by novated lease companies can lead to better deals than individual purchases. At the lease's conclusion, there's flexibility to buy the car, renew the lease, or sell the vehicle, often at a profit.

Disadvantages of a Novated Lease

Residual Value Obligation

The lease’s end is marked by the residual payment or balloon payment, a lump-sum representing the car's value at the end of the lease. This amount must be settled to take full ownership, which could be substantial depending on the lease's length.

Employment Change Complications

A novated lease is contingent on employment. Changing jobs means either renegotiating the lease with the new employer or reverting to a standard lease arrangement until re-employed, potentially at less favourable terms.

Limited to Dealer Purchases for GST Savings

The GST savings, a significant advantage of novated leasing, apply only to vehicles acquired through a registered car dealer. Private purchases don't qualify, potentially making other finance options more attractive.

Restricted Lease Provider Choice

Some employers have exclusive agreements with specific novated lease providers, which might not offer the best terms. This lack of competition can erode some of the tax benefits through higher fees.

Suitability for Salaried Employees Only

Business owners must pay themselves a salary to qualify for a novated lease. This requirement may limit the arrangement's applicability and prompt consideration of alternative finance options like chattel mortgages.

Potential for Unnecessary Extras

Some providers might include or aggressively upsell additional products like gap insurance or extended warranties, which may not always be necessary or cost-effective.

Complexity

Despite its financial advantages, a novated lease is more complex than traditional car buying or financing methods. It necessitates a clear understanding and careful negotiation to ensure it aligns with

personal financial goals and circumstances.

Benefits of a Car Loan

As with novated leases, there are several benefits to a car loan that make them an appealing and even preferable option.

Immediate Ownership Without Full Payment

One of the primary benefits of car finance is the ability to own a car immediately without having the full purchase price on hand. This allows buyers who need a vehicle urgently to buy a car without waiting to save the necessary funds.

Tax Deductions for Business Owners

For business owners, car finance costs can be tax-deductible. This includes interest on the car loan, insurance premiums, and costs related to repairs and servicing. It’s an attractive option for businesses needing to manage cash flow while also benefiting from the vehicle’s use.

Cash Flow Management

Financing a car allows individuals and businesses to have structured and predictable car loan repayments, enabling them to allocate their cash reserves to other pressing needs or investments. This flexibility can be crucial for managing unexpected expenses or taking advantage of other opportunities.

Credit Building

Making consistent, on-time payments on a car loan can help establish a positive credit history. This is beneficial for future financial endeavours, such as applying for a mortgage or business loan.

Disadvantages of a Car Loan

Interest and Higher Total Cost

Financing a car typically involves paying interest on the loan, which means the total cost of the vehicle can end up being higher than paying upfront in cash.

Commitment to Monthly Payments

A car loan is a financial commitment that requires regular monthly payments. This can be a strain on the budget, especially if financial circumstances change.

Risk of Negative Equity

Cars depreciate over time, and it’s possible to owe more on the loan than the car's worth, especially with long-term loans or minimal down payments.

Insurance Requirements

Financed cars often require comprehensive insurance coverage, which can be more expensive than the minimum coverage required for cars that are owned outright.

Restrictions on the Vehicle

Some finance agreements may impose restrictions on the vehicle, such as mileage limits or prohibitions on modifications.

Comparing a Novated Lease and a Car Loan

When comparing a novated lease to a car loan, several key factors come into play, each with its financial implications. The choice between these two options often hinges on individual circumstances, including the length of time you intend to keep the vehicle and your annual mileage.

Novated leases can offer initial cost savings and tax benefits, making them attractive for those eligible for salary-sacrificing arrangements. However, the long-term cost of a novated lease might exceed that of purchasing a car with a loan, especially when considering vehicle depreciation and the potential for higher costs if the car is kept beyond the lease term.

Additionally, the inclusive nature of a novated lease, covering running expenses, offers convenience but comes with its limitations, such as restrictions on vehicle modifications and potential excess charges for exceeding agreed mileage.

So, Which Option is Right for You?

The decision between opting for a novated lease or a car loan is nuanced, reflecting personal financial situations, future vehicle usage plans, and preferences for ownership and financial flexibility. A novated lease presents a pathway to lower initial expenses and simplified vehicle management, appealing to those who prioritize convenience and tax savings.

In contrast, a car loan affords the freedom and certainty of vehicle ownership from day one, appealing to those willing to accept higher monthly payments for greater autonomy over their vehicle. Evaluating these factors against your long-term financial and lifestyle goals is essential in making an informed choice that aligns with your needs.

For a great deal on financing your new purchase, contact Australia's best reviewed finance broker on 1300 Credit (1300 273 348) today or visit CreditOne.com.au