3-Year vs 5-Year Novated Lease: How the Numbers Change

Choosing between a 3-year and 5-year novated lease can make a noticeable difference to your regular repayments, residual value and overall vehicle costs.

A 5-year lease generally offers lower finance repayments because the cost is spread over a longer period. A 3-year lease usually involves higher repayments but gives you an earlier opportunity to review your vehicle and finance arrangements.

Neither is automatically cheaper overall. The right choice depends on your budget, how long you plan to keep the car and what you want to happen at the end of the lease.

At Fingo, we help Australians explore their novated leasing options and understand how different arrangements may affect their take-home pay.

What’s the Difference Between a 3-Year and 5-Year Novated Lease?

The main difference is how long you make lease payments and how much remains owing when the agreement ends.

With a 3-year novated lease, you make payments over 36 months. With a 5-year lease, payments extend over 60 months.

A longer term can reduce the finance repayment, assuming comparable finance conditions. However, you will pay more interest over the full term.

The residual value also changes. A 3-year lease has a higher residual amount than a 5-year lease on the same vehicle.

These are general differences. Your actual quote will depend on vehicle price, finance rate, fees, tax treatment and running costs.

Compare Your Lease Term Options

Not sure which term would suit your budget? Use Fingo’s Novated Lease Calculator to explore how changing the lease duration may affect your estimated costs and take-home pay.

How Do Repayments Change Between 3 and 5 Years?

A 3-year lease has higher finance repayments because most of the vehicle’s financed cost must be covered within a shorter period.

A 5-year lease spreads payments across an additional 24 months, reducing the regular finance repayment.

However, a lower repayment doesn’t necessarily mean a lower total ownership cost.

With a longer lease, interest continues to accrue over a longer period. The total finance cost would therefore be higher, even when individual payments are smaller.

It’s also important to remember that a fully maintained novated lease can include running costs such as insurance, registration, fuel or charging, servicing and tyres.

Those expenses form part of the overall budget, so the payroll deduction is not simply a vehicle loan repayment.

When comparing two quotes, check whether both use the same assumptions for annual kilometres, insurance and other vehicle expenses.

How Much Does the Residual Value Change?

Residual value is one of the biggest differences between a 3-year and 5-year novated lease.

It’s the amount remaining on the vehicle at the end of the lease term.

For cars with an eight-year effective life, the Australian Taxation Office provides commonly applied minimum residual percentages of:

• 3 years: 46.88% of the vehicle’s original cost
• 5 years: 28.13% of the vehicle’s original cost

These percentages are set out in the Australian Taxation Office’s residual value guidance.

Example: A $50,000 Vehicle

Let’s compare the standard minimum residual amounts using an illustrative vehicle cost of $50,000.

These figures illustrate residual calculations only. They are not complete novated lease quotes. The residual calculation base, GST treatment, finance charges and other costs may differ in an actual arrangement.

A 3-year lease leaves a larger amount to deal with sooner. A 5-year lease generally leaves a smaller residual, but you make payments over two additional years.

This is why the lowest regular repayment shouldn’t be your only consideration.

Does a 5-Year Novated Lease Save More Money?

Not necessarily.

A 5-year novated lease may feel more manageable because the regular finance repayment is generally lower.

However, the longer finance period can increase total interest costs. You also remain committed to the arrangement for longer.

A 3-year lease may have higher regular repayments but could involve less total interest under otherwise comparable conditions.

Your tax outcome also matters. Novated lease benefits depend on your salary, vehicle type, applicable fringe benefits tax treatment and how the arrangement is structured.

A longer lease doesn’t automatically produce greater tax savings.

The better comparison is the overall financial position across each term, including the amount deducted from your pay, total finance costs, running expenses and residual value.

What Happens to Running Costs Over Each Term?

Running costs are another important consideration when choosing a lease duration.

A fully maintained novated lease commonly includes a budget for fuel or charging, registration, insurance, servicing, maintenance and tyres.

Over three years, you’ll generally have fewer years of scheduled servicing and vehicle use than over five years, assuming similar annual driving distances.

However, as a vehicle gets older, certain maintenance expenses may increase.

For example, a five-year ownership period may involve additional tyre replacements, more scheduled servicing or repairs that weren’t necessary during the first three years.

Electric vehicles can have different maintenance requirements from petrol vehicles, but they still require servicing, tyres and insurance.

Understanding which running costs can be bundled into a novated lease can help you compare more realistic budgets.

Which Lease Term Gives You More Flexibility?

A 3-year novated lease may suit someone who expects their circumstances to change within the next few years.

For example, you might be planning to upgrade your vehicle, change jobs or reassess your transport needs.

Because the agreement ends sooner, you have an earlier opportunity to review your options without needing to end the lease ahead of schedule.

A 5-year lease may appeal to someone who intends to keep the same vehicle for several years and prefers generally lower regular finance repayments.

However, changes to your employment can affect either arrangement.

If you leave your employer, your novated lease obligations don’t simply disappear. Depending on the provider and agreement, you may need to arrange a new salary packaging agreement, make payments directly or consider other options.

Early termination can also involve additional costs.

Before selecting a term, consider how confident you are about your employment, vehicle needs and budget over the proposed period.

See How Your Lease Term Affects Your Budget

Thinking about keeping your car for five years, or would a shorter term suit you better? Compare different lease durations using Fingo’s calculator before requesting a personalised quote.

Is a 3-Year Novated Lease Better for Electric Vehicles?

The choice between three and five years can be particularly relevant when leasing an electric vehicle.

EV technology, driving range, charging capability and resale values can change over time.

A shorter lease may appeal to drivers who want the flexibility to consider newer EV technology sooner.

A longer lease may suit someone comfortable keeping their electric vehicle for several years, particularly if it meets their driving and charging needs.

Eligible electric vehicles may also qualify for the electric car fringe benefits tax exemption (EV FBT Exemption), subject to the applicable rules.

However, the exemption doesn’t automatically make a particular lease term better.

Your vehicle price, salary, finance costs, running expenses and residual value still need to be considered.

If you’re comparing electric and petrol vehicles, Fingo’s guide to EV novated lease calculator savings provides additional context.

What Happens When Your Novated Lease Ends?

Whether you choose three or five years, you’ll need to decide what to do when the agreement reaches its end.

Depending on your lease provider and circumstances, options may include paying the residual amount to keep the vehicle, arranging eligible refinancing, selling or trading the car and settling the amount owing, or entering another suitable arrangement.

These options aren’t automatic and may involve additional conditions or costs.

Importantly, the residual value isn’t a guaranteed future resale price.

If the vehicle’s market value is below the amount required to settle the lease, you will need to cover the difference.

Planning for this amount from the beginning helps avoid surprises.

How to Choose Between a 3-Year and 5-Year Novated Lease

Start by considering how long you realistically expect to keep the vehicle.

If you prefer changing cars regularly or expect your needs to change, a shorter term may provide more flexibility.

If you’re comfortable keeping the same car longer and want generally lower regular finance repayments, five years may be worth comparing.

Then review the numbers using consistent assumptions.

Keep the vehicle price, annual salary and kilometres the same while changing the lease duration. This makes it easier to identify which differences are caused by the term itself.

Pay attention to the residual amount and ask for a breakdown of total finance costs, running budgets and any applicable fees.

If you’re unsure how closely online figures reflect a final quote, Fingo also explains how accurate novated lease calculators can be.

Find the Novated Lease Term That Suits You

A 3-year novated lease offers an earlier opportunity to reassess your vehicle needs, while a 5-year lease generally spreads finance repayments over a longer period.

The best option depends on more than your regular payroll deduction. Consider the total finance cost, running expenses, residual value and how long you expect to keep the vehicle.

With Fingo’s novated leasing services, you can explore your options and move towards a personalised quote that reflects your circumstances.