Novated Lease vs Car Loan: A Comprehensive Comparison Guide
Understanding Your Car Financing Options
If you’re in the market for a new or used car but don’t have the funds on hand, there are two things to know.
Firstly, you’re not alone. Finder estimates that 2.5 million Aussies have car loans, and ABS data shows that new vehicle financing hit an all-time high of $1.563 billion in September 2024.
Secondly, you’ve got options. You have probably heard about novated leasing, a potentially more tax-effective way to drive your dream car.
This comprehensive guide will break down the pros and cons of a novated lease vs a car loan, helping you make the right decision for your situation.
Novated Lease vs Car Loan: Understanding Your Options
What is a Novated Lease?
A novated lease is a salary packaging arrangement where you access some of your before-tax income to make payments. These payments bundle the car finance and running costs like registration, fuel or charging, insurance and servicing into one regular payment, simplifying your expenses.
Eligible electric vehicles (EVs) can benefit from further potential tax savings. We'll get into that a little later.
What is a Car Loan?
A car loan is a traditional financing option where you borrow money from a lender (a bank, dealership, or financial institution) to purchase a vehicle. You repay the loan over a fixed period, plus interest.
Unlike a novated lease, car loan repayments come from your after-tax salary, and you'll need to budget separately for ongoing costs like registration, fuel,and insurance.
Novated Lease vs Car Loan: Key Comparisons
| Feature |
Novated Lease |
Car Loan |
| Definition |
A financing arrangement allowing
payments from some of your before-tax
salary, including running costs. |
A loan from a lender to purchase a car,
repaid with interest from after-tax income. |
| Tax Benefits |
Could reduce taxable income as
payments are made using some of your
before-tax income depending on the car you choose. |
No tax advantages; repayments are
made from after-tax income and interest
is not tax-deductible. |
| GST Savings |
Depending on your employer, you
could save GST on the purchase price of
the car and the ongoing running costs
for the life of your lease. |
No GST savings unless the car is
used for business purposes. |
| Budgeting |
Predictable all-in-one, regular payment
for lease and running costs. |
You must budget for repayments,
running costs and repairs separately. |
| Upfront Costs |
No upfront deposit. |
Often requires a deposit. |
| Ongoing Fees |
Establishment and admin fees may
apply; these are included in the payments. |
Establishment and potential servicing
fees apply, including early payout fees. |
| Duration |
Typically 1-5 years. |
Varies but usually between 3-7 years. |
| Ownership |
You lease the vehicle with an option
to buy out, trade-in, or refinance at the end. |
Outright ownership from the start. |
| Residual Value |
A residual payment, calculated by the ATO,
is due at the end to own the car outright. |
Residual balloon payment is optional
and can lower repayments. |
Why a Novated Lease Stands Out
For many Aussies, particularly those eyeing an EV, a novated lease offers a compelling alternative to traditional financing.
Unlocking Tax Advantages
One of the most attractive features of a novated lease is the potential for serious savings.
- Tax-effective salary packaging: This is the core of the novated lease advantage. Your employer deducts lease payments before calculating income tax, this could reduce your taxable income and you could take home more each pay.
- GST savings: You may save GST on the purchase price of the car, this could be as much as $6,334.
- More GST savings: On top of that, you could save GST on running costs like fuel and insurance. That's a possible 10% saving on costs that can really bite, compared to a traditional loan where you get slogged for GST after already paying income tax.
All up, you're looking at potential savings of thousands each year. Use our calculator to see just how much more you could pocket on a novated lease.
Bundling Costs for Stress-Free Budgeting
A novated lease takes the hassle out of budgeting by bundling the finance, registration, fuel or charging, insurance, servicing, registration, and even tyres into one regular payment.
No more scrambling for registration renewals or a big service – it’s all taken care of, down to a new set of tyres during your lease.
No Upfront Deposit
Unlike traditional car loans, most novated lease arrangements don’t require any upfront payment. This makes it easier to get behind the wheel of your dream car sooner.
Easier Path to an EV
The Australian Government's Electric Car Discount Scheme makes novated leasing even more attractive for eligible EVs. Under the scheme, 100% of your payments are made before -tax, which could result in great savings compared to getting a loan or buying outright.
Check out the eligibility guidelines here to see if the EV you want is eligible.
Flexibility in Car Choice
With Fleetcare's novated lease, you can access exclusive fleet discounts and potentially better pricing than private sales. We'll source your new (or used) car with great discounts.
You've got more flexibility at the end of the lease term as well. You can:
- Trade-in for a newer car
- Pay the residual value and own the vehicle outright
- Refinance the residual value and start a new lease with lower payments
Learn more: End of Novated Lease Options.
When a Car Loan Is an Option
Although car loans don't offer the same tax benefits or bundled cost advantages, there are certain circumstances where they might be more suitable.
No Salary Packaging Access
Unfortunately, some companies can't offer salary packaging for example, if it would reduce your income to below the National Minimum Wage or aren't yet swayed on the benefits of novated leases for employers.
Sole traders are also ineligible. If you can't convince your boss, or if you are the boss, a traditional loan might be your best bet.
Prioritising Ownership
With a car loan, you own the vehicle outright from the moment the loan is approved. This means you have complete control from day one, including modifying, selling, or keeping the car for as long or little as you like.
Avoiding Residual Payments
At the end of a novated lease, a residual payment (set by the ATO) is required if you choose to own the car outright. We know budgeting for this isn't always realistic, given cost-of-living pressures.
Classic Cars and Cheap Runabouts
While you can novate a used car even your existing car there might be restrictions for older models. If you're looking to purchase an older,less expensive vehicle, a car loan might be more straightforward.
That said, we assess every vehicle case-by-case. Feel free to get in touch with our team for personalised advice.
Novated Lease vs Car Loan: Which Road is Right For You?
How you choose to finance your car can impact everything from your monthly household budget to long-term savings plans, tax obligations, and even which car you drive. And the best option for you depends on your employment status, financial situation, and how you drive.
Simply put, there's no one-size-fits-all option. A novated lease is often a great choice for professionals and EV enthusiasts, but there are always exceptions.
If you're interested in exploring your options, our novated lease team would be happy to provide more information. Contact Fleetcare on 134 333 or via the form below.