Which option is best? Your questions about car loans vs novated leases answered.
If you’re in the market for a new car and in the process of comparing finance options such as novated lease vs car loan, then this article is for you. Here, we’ll compare the two options and explain why in our experience a novated lease is often not a good choice.
What Is A Novated Lease?
A novated lease is essentially a contract between three parties: you, your employer and a lender.
Novated leases are a type of finance arrangement commonly used in conjunction with salary packaging or a salary sacrifice program. Essentially, this means that your employer will pay your car payments directly to the novated leasing lender by deducting a pre-tax income from your salary.
What is a car loan?
A car loan is a loan you can take out to purchase a vehicle if you don’t have the funds upfront. This type of loan allows you to borrow a set amount of money to buy the car, which you then repay over a certain period of time with interest. You can get a car loan from a bank, credit union or finance company and they will usually require the vehicle to be used as security.
What is the difference between a novated lease and a car loan?
White both a novated lease and a car loan involve regular repayments, there are some important differences. A novated lease is a type of car finance that allows you to pay off the cost of your vehicle through your employer using pre-tax earnings. It’s similar to a traditional hire-purchase agreement, but instead of buying the car outright and then paying for it over time, you’re leasing it from an approved lender on behalf of your employer.
In contrast, with a car loan, you’re the vehicle owner from the beginning of your loan, and you pay it off with after-tax earnings.
Why choose a novated lease?
Here’s some of the benefits of choosing a novated lease:
- Tax savings. With a novated lease, the running costs of your car are deducted from your pre-tax income. This means that any interest, depreciation and insurance payments are not taxed at all.
- Maintenance Discounts. Novated leases typically include maintenance costs in the monthly payment. This means the lease provider takes care of car servicing and maintenance, fuel and breakdown cover in your monthly repayment.
- GST Free. As the novated lease provider claims back the GST on the purchase price, you pay less for your car.
Why choose car finance?
Here’s why a car loan might be a better option:
- More choice. You can buy older used cars than you are allowed with novated leasing, so you don’t have to spend as much on a car if you don’t want to.
Wondering whether to buy from a car dealer or private seller? We share tips here in our article. - More freedom. You can drive as often as you like without restrictions, and can also sell the car when you want, as long as you pay back the loan in full.
- Trade in. You can reduce the amount you need to borrow by trading in your old car, or paying a deposit.
Weighing up the costs
We have outlined the benefits above, and there are also some disadvantages to consider for each option.
- With a novated lease, the contract is tied in with your employment. Therefore, if you lose your job, the lease may be terminated early. Additionally, you’ll be responsible for paying any residual liability at the end of the lease term, and may have to pay fees if the car has been used more than the wear and tear lease conditions allow.
- When it comes to car loans, all car expenses are paid from post-tax income. You may need a vehicle repair loan if something significant goes wrong with the car and you don’t have the funds available to fix it. Another consideration is if you miss repayments, the lender may repossess the car.
Do I need good credit to get a novated lease?
If you’re looking to lease a car, but don’t have the best credit score, then a novated lease may be your best option. Since the employer is borrowing money rather than you directly, they are able to factor in things like income and employment history when determining whether or not they will approve your application. This means that even if you have poor credit history, you may still be able to get approved for a novated lease.
If you have a poor credit rating, click here to learn about bad credit personal loans.
Why a car loan is a better option than a novated lease
When you buy a car with a loan, the payments are generally lower and easier to manage than if you were to lease. This is because when you finance a car using a car loan, the interest rate on your loan will be lower than that of any novated lease agreement. The amount that is owed each month will also be smaller as it covers only what was borrowed rather than being based on inflated monthly payments like those seen in novated leases.
We hope this article has helped you to understand the differences between a novated lease and car finance. If you’re still unsure about which option is best for you, then we suggest that you speak to one of our friendly finance brokers who will be able to answer your questions.
