If you are looking to upgrade to a new set of wheels, you may consider a number of options to fund your purchase as opposed to dipping into your savings. To help determine the best option for your financial position, here we will break down the ins and outs of two of the most common methods of vehicle finance - novated leases and car loans.
A novated lease is a leasing agreement between yourself, your employer and a financial provider. This agreement is set up within your income, giving your employer the ability to commit to paying for the vehicle by taking regular contributions from your pre-tax salary. In essence, this means you are solely paying for the vehicles use over time, as opposed to outright vehicle costs in addition to vehicle use.
- Tax benefits: A key advantage of a novated lease is that lease payments are contributed from your pre-tax salary. This means you have the potential to save on tax expenses as your taxable income is lowered.
- Ownership costs: Ownership costs including maintenance, fuel and registration are typically packaged into your pre-tax payment allowing you to save thousands when compared to paying such expenses outright.
- Avoiding GST: Given the vehicle is owned by someone else and you are ‘leasing’ it, you can avoid paying GST entirely.
- Flexibility: At the end of the lease, you can decide whether to end the contract, buy the car, or extend the lease.
- Personal ownership: As the name suggests, at the end of the day you are simply paying to ‘lease’ the vehicle. This means you do not own the vehicle outright.
- Unable to alter or modify your vehicle: No internal or external modifications are allowed to the vehicle, given you do not have sole ownership over the vehicle.
- Kilometre restrictions: Vehicles purchased via novated leases are often bundled with restrictions on how many kilometres they can be driven per year. If you drive more than the agreed amount, you may pay extra fees.
- Lease payments are tied to employment status: If your circumstances were to change resulting in a shift in employment status, you will remain liable for making lease payments.
A car loan is a specific type of loan tailored to the purchase of a new or used vehicle. As with any loan, you are required to pay back a car loan and its associated interest costs through regular repayments over an agreed period of time.
- Personal ownership: Unlike a novated lease, purchasing a car with a car loan puts the car's title in your name. This title become clear once the car loan is paid off over a period typically from one to five years. Until that point in time, the lender holds an interest in the car given debt is outstanding.
- Unrestricted access: As the owner of the vehicle, you’re free to drive it as much as you like, wherever you like or modify it however you want.
- You can sell the car: Even if you still have a debt owning on the car, you're generally free to sell it, however it’s important to consult with your lender before doing this as there may be specific fees, terms or conditions that must be met.
- Ability to compare: There are many providers of car loans in Australia offering secured or unsecured car loans at fixed or variable interest rates. Car loan customers have the power to shop around to find a good value product with the right features for them.
- Higher recurring payments: As you are paying off the total cost of the car instead of merely paying for its use, car loan repayments are likely to be higher than novated lease payments..
- Selling hassle: If you want to upgrade to a newer model or a different vehicle completely due to a change in circumstances, you’ll have to deal with the hassle of selling the car or trading it in.
- Depreciation: Cars are renowned for the pace at which they depreciate, particularly in the first couple of years. This means your new car asset is losing value almost immediately.
Differences between novated leases and car loans
Aside from both being financial products, there are some key differences when it comes to choosing between a novated lease and a car loan. While both require regular repayments and are tailored to personal use, a car loan offers personal ownership from the onset of the loan. This differs from a novated lease as personal ownership takes place once the term ends and you pay the residual amount agreed upon prior to the lease commencing.
Repayments is another point of difference between the two products, whereby with a novated lease repayments are made typically with pre-tax or gross pay. This means you may earn less pay each week, yet you make up for this difference with a lower taxable income. On the other hand with a car loan, repayments are made typically with after-tax or net pay earnings.
Novated leases can be structured to include vehicle maintenance, repairs, fuel, insurance and registration expenses, whereas a car loan will require you to pay these expenses out of your pocket.
Choosing between a novated lease and a car loan
No matter which financial option you choose to help achieve your new car dreams, the main factor at play is your current financial position. Car loans are typically the more popular option when compared to novated leases given the additional flexibility they can provide, as well as the opportunity to offer personal ownership. On the other hand, a novated lease can generally only be accessed if your employer offers the ability to salary sacrifice. To find out if your employer offers the ability to salary sacrifice, simply chat to a member of your organisation.
For more information on the differences between a novated lease and a car loan and to help you on your new car journey, talk to our dedicated team of car finance brokers for more information.