Novated lease vs. car loan – which one to choose?

A novated lease is a three-way arrangement between you, your employer, and the lender, using your pre-tax income as a salary sacrifice. A fully maintained novated lease can also cover the cost of running expenses such as fuel and maintenance, as well as the vehicle itself.

In a novated lease, you borrow from the leasing company and pay off the amount over a set period. Your employer makes payments directly from your pre-tax salary over the lease period, which is generally between two and five years.

At the end of the novated lease period, there is typically a residual amount left to pay, and a few options available to settle it:

• You can take out a new lease and exchange your car for a new one.
• You can extend the lease and refinance the balance.
• You can pay the residual amount and purchase the vehicle outright.

A car loan is a type of personal loan that you can use to buy a new or a used vehicle if you can’t afford to pay for one upfront. There are different types of car loans for buying new or used vehicles, and the average car loan term is about seven years. ​​During the term, you’ll need to make regular repayments to pay off the lump sum you borrowed (the principal), as well as interest charges. You can use a car loan calculator to estimate your repayments, as well as the loan’s total cost overall.  

Your car may be used as collateral to secure the loan if you opt for a secured car loan. Even though the interest rate on a secured loan is often lower than an unsecured loan, the lender may repossess the car to recover the loan if you delay or miss repayments.

A novated lease could potentially help you save, but you need to compare the pros and cons before making that choice. Some of the factors you should consider when choosing between a novated lease vs finance are:

• How long do you plan to keep the car? Generally, the longer you retain a vehicle, the more you’ll save by buying instead of leasing it. This is because a car is a depreciating asset, and its value can reduce significantly in the first few years.
• The wear and tear on the car will be lower if you drive less than the agreed distance in the lease. This in turn means you may pay higher maintenance costs than necessary.
• Depending on your total taxable income and the cost of the car, leasing can potentially allow you to enjoy significant tax savings over time.
• You can consider a lease if your employer is ready to set up a salary sacrifice arrangement for buying a car.
• You can consider a loan if your savings are sufficient for a deposit, and monthly income will cover the repayments.
• Some leasing companies don’t allow you to choose the car insurance policy, so you may not get the coverage and premium you want.
• If you lose your job, the novated lease is converted to a regular consumer lease, and the tax deduction and maintenance benefits are lost.

Talk to an independent advisor and calculate your monthly payments before deciding.