- Do you need a new car but can't decide between leasing or getting a loan?
- A novated lease can make it cheaper to lease a car than buying it, but only if you don’t lose your job during the term of the lease.
- A car finance agreement secures the loan against the new vehicle, but you’ll be listed as its owner and will still be able to pay the loan if your employment status changes.
Financing the purchase of a new car can be challenging. Among the many financial products, two that stand out are novated leases and car loans.
Although a novated lease won’t grant you ownership of the vehicle, it is often cheaper than a loan. But is it the right solution for you? Let’s find it out.
In this guide
Novated leases
A novated lease is essentially a salary sacrifice solution that allows you to pay for your car using your pre-tax earnings. Like all salary sacrifices (or salary packages), a novated lease is a 3-way agreement between the leasing provider, yourself, and your employer.
The main benefit is the reduction of your taxable income. You won’t own the car, but the provider could cover the vehicle maintenance costs.
What they’re for
Novated leases are an excellent choice for employed individuals who don’t have the funds or don’t want to pay an upfront deposit.
The solution also suits people who want to renew their car every few years – most leases allow you to extend the agreement and exchange the used vehicle for a new one after the term ends. However, keep in mind that you could be up for additional costs if the car exceeds the wear and tear conditions.
How it works
A novated lease is an agreement between three parties that could save you money in the long run.
One of the principal players is your employer, who takes out the car payments from your pre-tax salary and gives it to the lease provider. You’ll get the car and enjoy tax benefits since your income tax will now be calculated on the reduced salary.
The employer will also enjoy tax benefits, whilst the lease provider will face fewer risks. That said, your lease might be terminated, and you could be required to pay any outstanding amounts in one lump sum if you lose employment during the lease term.
Typical costs
Most novated lease prices start around $800 per month for a $30,000 car. However, this rate is deducted from your pre-tax salary. Even if a loan may seem cheaper, you can save around $200 a year with a lease.
Liability
Although a novated lease transfers the obligation for the payment from you to your employer, you’ll still be liable for paying any money owing if you lose employment during the lease term.
Who can get them
Anyone can get a novated lease as long as you’re employed and pay tax. However, you should discuss this option with your employer before applying.
Pros and cons
Pros
- Easier to get compared to a car loan.
- You may benefit from discounts on running and maintenance costs.
- A novated lease will reduce your taxable income.
- You can lease new and used cars alike.
- Flexibility at the end of the lease. You can decide whether to end the contract, buy the car, or extend the lease.
Cons
- You will be responsible for paying any residual liability at the end of the lease.
- The lease may be terminated early if you lose employment.
- You may have to pay additional fees if the car exceeds the wear and tear conditions at the end of the lease.
Car loans
A car loan is a secured personal loan in which your newly purchased car is used as collateral. This gives the lender more security because they can repossess and sell the vehicle if you fall behind with the payments. However, some lenders limit the vehicle makes and models that you can purchase.
That said, a car loan has lower monthly costs compared to a novated lease – although it may not give you any tax benefits.
What they’re for
Car loans are ideal for people who want to own their new car. Some lenders offer reduced rates if you trade in your old vehicle.
You may also enjoy a car loan more if you want to make changes to the vehicle. Furthermore, you won’t have any residual liability at the end of the term and won’t be charged for the vehicle’s wear and tear.
How it works
Car loans work like all personal loans – you borrow money from a lender to buy the car and agree to pay back the funds plus interest and fees over a set period of time. Your employment status might matter in getting the loan approved, but your employer won’t play any role in the agreement. Thus, you can keep the car and continue with the repayments even if you lose employment during the term.
Typical costs
Car loan repayments are cheaper than novated leases – you’ll pay around $600 a month for a $30,000 car. However, this amount won’t be deducted from your pre-tax salary. Even though the repayments are cheaper, you’ll save more with a novated lease deal.
Liability
You are liable for all repayments and will risk losing the car if you miss them or in case of default. However, you also risk losing the car if you lose employment during a novated lease term.
Pros and cons
Pros
- You will be the owner of the car as soon as you buy it, even if the lender uses it as collateral.
- You can drive as much as you want with no wear and tear restrictions.
- A car loan can give you the flexibility to sell the car whenever you want, provided that you’re able to pay back the loan in full or the new buyer agrees to take it over.
- You can pay a deposit or trade in an old car to reduce the borrowed amount.
- Most car loans give you the possibility to repay early without incurring additional fees.
Cons
- Interest and running costs are paid from your post-tax income.
- The lender may repossess the car if you fail to make payments on time.
- Your options may be limited to specific makes and models.
Which is better?
A novated lease can save you some money, but which is better depends on your personal circumstances. Weigh up the pros and cons of each solution and decide what’s best for your unique situation.
