27, Feb, 2018

Novated Lease vs Car Loan: Which should you choose?

Finding a deal that meets your requirements can be difficult, especially if you’re not sure about the car financing options out there. We compare both a novated lease and a car loan to help you make the right decision.

What is a Car Loan?

A car loan is a vehicle finance option in which an individual borrows a sum of money to purchase a car. Typically, the borrower is bound by contract to pay back the full amount as well as a percentage of interest by an agreed date.

What is a Novated Lease?

Novated leasing is a low-cost approach to securing a vehicle whereby your finance and running costs are GST free and collected in part or wholly from your salary, reducing taxable income and optimising take-home pay. Therefore, your weekly cash flow is not used to pay for registration, insurance, fuel, servicing, tyres or roadside assistance.

Car Loan advantages and disadvantages

Advantages:
  • There is the option to be more flexible with contracts (i.e. contracts can be written without a balloon payment).
  • You’re able to pay a deposit or use the equity from a trade-in to reduce the financed amount.
  • There are no restrictions on how many kilometres you can cover during the finance period.
Disadvantages:
  • Maintenance and running costs can add up. It does not include the budgeted running costs, and therefore you pay from your post-tax income.
  • You are likely to pay full retail price for the car, and you are unable to claim the GST on the purchase.
  • Going directly to the dealer can be expensive. You don’t have the same access to fleet discounts for the purchase price and budgeted running costs.
  • When it comes to selling the car it can be difficult. If you choose to sell your car privately it can take up a lot of time and effort.

Novated Lease advantages and disadvantages

Advantages:
  • Unlike car loans, you can gain discounts on the purchase of the car, fuel, running and maintenance costs.
  • You don’t need to provide an upfront deposit for your car. You’ll make simple repayments straight from salary to cover the finance and running costs, which may help you to manage your finances.
  • When setting up a Novated Lease, you’ll have the option to include or exclude specific lease budgets.
  • The financed amount is based on the purchase price of the car minus the GST.
  • You have the choice to lease a new or used car.
  • There are tax benefits to help reduce your taxable income. It’s recommended you check with your accountant or financial adviser to discuss the best option for your personal circumstances.
  • You don’t need to use the car for business purposes. The car can be used 100% for private use.
  • At the end of the lease, you can make an offer to purchase the car or extend the lease.
Disadvantages:
  • At the end of the lease, the residual liability rests with you. Any shortfall between the residual value and the sale price of the car needs to be paid by you to finalise the lease.
  • If the car exceeds the wear and tear conditions, you could be up for additional costs.*

There are various finance options available, but we recommend that you talk to an accountant or financial adviser to see which option is right for you.

To view how much money you could save on a Novated Lease, view our easy Novated Lease Calculator here.

*This only applies to Novated Operating Leases.