How Does a Novated Lease Differ from a Car Loan?

When considering financing options for a new vehicle in Australia, two popular methods often come to the forefront: novated leases and car loans. Both have their unique features, benefits, and considerations. Understanding the distinctions between them is crucial to making an informed decision that aligns with your financial situation and lifestyle.

 

Novated Lease Basics & Overview

A novated lease is a three-way agreement involving you (the employee), your employer, and a finance company. In this arrangement:

• Vehicle Selection: You choose the car you wish to lease.
  
• Lease Agreement: Your employer enters into a lease agreement with the finance company on your behalf.
  
• Salary Sacrifice: Lease payments are deducted from a combination of your pre and post tax salary, potentially reducing your taxable income.
  
• Running Costs: Often, running costs such as fuel/charging, maintenance, registration, and insurance can be bundled into the lease, simplifying budgeting.
  

At the end of the lease term, you typically have options to:

1. Pay the residual value to own the car outright.
   
2. Trade the vehicle in for a new lease.
   
3. Refinance the vehicle.
   

It’s important to note that the car remains the property of the finance company during the lease period.

 

How Does a Novated Lease Differ from a Car Loan?

A car loan, in contrast, is a more straightforward arrangement:

• Loan Agreement: You borrow a set amount from a lender to purchase the vehicle.
  
• Repayments: You make regular repayments (including interest) to the lender over an agreed term.
  
• Ownership: The car is registered in your name from the outset, though the lender may hold a financial interest until the loan is repaid.
• More flexibility, you can have a deposit, trade ins, any amount of balloon
• Ability to make additional repayments
  

 

Key Differences

1. Payment Structure:
   
   • Novated Lease: Payments are made from a combination of your pre and post tax salary through salary sacrificing.
     
   • Car Loan: Repayments are made from your post-tax income.
2. Tax Implications:
   
   • Novated Lease: By reducing your taxable income through a combination of the pre and post tax lease payments, you may lower your overall income tax. Additionally, you can save on Goods and Services Tax (GST) for both the vehicle purchase and running costs. However, Fringe Benefits Tax (FBT) may apply, though strategies like employee contributions can mitigate this.
     
   • Car Loan: No direct tax benefits. All repayments are made with after-tax dollars, and GST is paid on the purchase price and running costs without exemptions.
3. Running Costs:
   
   • Novated Lease: Potential to bundle running costs into the lease, offering convenience and possible GST savings.
     
   • Car Loan: You manage and pay for running costs separately, with no GST concessions.
4. Flexibility and Commitment:
   
   • Novated Lease: Tied to your employment. If you change jobs, arrangements need to be made to continue payments, which could be complex if the new employer doesn’t offer salary packaging. Or if your new employer allows, you can transfer the lease over to your new employer.
     
   • Car Loan: Independent of your employment status, offering more flexibility if you change jobs.
5. End of Term Options:
   
   • Novated Lease: Options to pay the residual value to own the car, re-lease, or upgrade to a new vehicle.
     
   • Car Loan: Once the loan is fully repaid, you own the car outright with no further obligations.

 

 

Pros and Cons

Novated Lease:

Pros:

• Tax Efficiency: Potential reductions in taxable income and GST savings.
  
• Convenience: Bundling of lease and running costs into a single payment simplifies budgeting.
  
• Access to Fleet Discounts: Possible savings on vehicle purchase price and running costs through employer-negotiated deals.
  

Cons:

• Employment Dependency: Requires employer participation; changing jobs can complicate the arrangement.
  
• Complexity: Understanding FBT and managing contributions can be intricate.
  
• Residual Value Obligation: A lump sum payment is required at the end of the lease to own the vehicle.
• Can not have a deposit, or trade in value against the lease and must have a residual at the end of the lease
  

 

Car Loan:

Pros:

• Ownership: Immediate ownership of the vehicle, with the freedom to modify or sell as desired.
  
• Flexibility: Independent of employment, offering stability regardless of job changes.
  
• Simplicity: Straightforward repayment structure without the complexities of FBT.
• Can have a deposit, trade in value against the loan and any amount of balloon at the end.
  

Cons:

• No Tax Benefits: Repayments are made from after-tax income with no GST savings.
  
• Separate Running Costs: Must manage and budget for running costs independently.
  

Interest Payments: Total cost includes interest, which can be significant over the loan term.

 

 

Long-Term Financial Impact

Choosing between a novated lease and a car loan depends on various factors, including your income level, employment stability, and personal preferences. A novated lease can offer substantial tax savings and convenience but requires careful consideration of employment continuity and understanding of FBT implications. On the other hand, a car loan provides straightforward ownership and flexibility but lacks the tax advantages.

 

Why Choose Fingo?

At Fingo, we specialise in providing tailored vehicle financing solutions that suit your individual needs. Whether you’re considering a novated lease or a car loan, our team of experts is here to guide you through the process, ensuring you understand all aspects and make the best decision for your circumstances. With our commitment to transparency, competitive rates, and exceptional customer service, Fingo is your trusted partner in navigating the journey to your next vehicle.

For more information and personalised assistance, visit our website at fingo.com.au or contact our friendly team today.