Buying a car is rarely an easy process. Most people can’t afford to buy a brand new car outright in their lifetime, so you look for other options that can take the financial pressure off – like financing or a second hand vehicle purchase. But how do you know which option is right for you? With the interest and hidden costs of many finance solutions, or buying a second hand car that may not be reliable, it can definitely be a time consuming and frustrating journey for many.
Novated leases have given many new car owners an opportunity that’s both practical and cost effective. As a three way agreement between you, your employer and a finance company, drivers and workers are given a fantastic option to purchase either a new or used car suitable for their needs and budget. Combined with salary sacrifice arrangements and assistance with regular payments to the finance company, it’s a solution that’s helped many people get their very own wheels.
Drivers that do take advantage of the Novated Lease benefits also ease the pressure and costs involved with looking after a vehicle. This includes the maintenance of the vehicle from repairs and regular services, arranging comprehensive insurance, registration and fuel. But how does Novated Lease compare with other buying options? Let’s take a look!
Novated Lease vs. Finance
For many drivers, taking out a loan to finance a new or used car tends to be the most popular option. Most drivers will opt for either a car loan or a personal loan from the bank and both require about the same amount of paper work and credit history to get it over the line. Depending on your credit history, the amount of the car and the type of loan you take on, you may have to fork out a deposit for the vehicle too.
Although purchasing a car through finance can be the most familiar option for drivers, it does come with interest rates too. These vary significantly from loan to loan and can end up costing you a fortune down the track. On the other hand, a Novated Lease still has an arrangement with a finance company but it’s much more transparent than a car loan – which can seem a lot more attractive than what it actually is.
Novated Leases will still offer a monthly sum to be paid by yourself as the driver but this amount is taken out of your salary before tax. This has an added bonus of lowering your taxable income so you pay less tax. On top of this, you’ll also be able to add on to your monthly fee fuel costs and any other costs associated with running and maintaining your vehicle. For many drivers, this is a convenient option that means all car costs can be consolidated into one easy to manage payment.
Novated Lease vs. Buying Outright
Whilst buying a car outright can be a feasible solution for drivers wanting a second hand car, it’s not always practical for a brand new car. Unless you have been on a strict saving plan for years, won lotto or earn a significant above-average wage, it’s rarely a practical plan for the average person.
Buying a car outright with the cash you have saved comes with one big advantage though – it’s yours outright with no more to pay and nothing further to owe. It also has a notable downside – unless you’re planning to keep the vehicle until it literally falls apart, then it doesn’t always make a lot of financial sense to buy outright.
When it comes to Novated Leases, you’ll have the option to buy a new or used vehicle. If novating a used vehicle, there may be restrictions depending on the age of the vehicle (for example, if the vehicle will be older than 7 years at the end of the lease) but all used vehicles are assessed on a case-by-case basis. Depending on how much you earn and the price of your chosen vehicle, you can end up losing very little in the amount of pay you take home. Plus, you’ll have new wheels to go with it. This avoids digging into your ‘rainy day’ savings account.
Novated Lease vs. Hire Purchase
Normally offered by car yards, a vehicle purchased on a hire purchase agreement can sometimes be confused as a ‘car finance loan’. Under a hire purchase agreement, the finance company will purchase the vehicle on your behalf and you will gain possession of the car (hire the vehicle) in return for regular payments. At the end of the contract, you have the option to buy the car and like a car loan, you’ll be required to put down a deposit initially (usually around 10% of the car price). The biggest difference between a hire purchase agreement and a car or personal loan is that with a loan you borrow money, pay for your new vehicle and own it immediately. But with a hire purchase agreement you don’t own the car until the last payment has been made. For this option to work, you need a better than average credit rating and because the car is technically under a loan you won’t own it until you make the last payment. Whilst this can be considered a simple car finance option, it can prove to be a messy situation, depending on your provider, if you run into financial difficulties down the track.
With a Novated Lease, the car will be yours – despite the fact you are only making the monthly payments. If you leave the company which you have done the Novated Lease through, you will then have an option to buy the vehicle outright. If you can’t afford that option the Novated Lease can be transferred to your new job with a new monthly fee negotiated.
Novated Lease vs. Mortgage Redraw
It’s these incredibly low interest rates that tempt homeowners to redraw additional home loan payments to buy a car. The problem? Most mortgages are likely to be a 20 year term (or more!). If you pay back the money redrawn for your new car over the same period – a $30,000 vehicle can easily turn into a $55,000 so really.
In comparison to other buying options, Novated Leases are able to take off the financial pressure of buying a car whilst still providing a transparent solution. Combined with the added benefits of maintenance services, consolidated fuel costs, Fringe Benefits Tax (FBT) and the mileage driven in your new car, Novated Leases can really provide the whole package for drivers seeking a vehicle for their budget and needs. Want to find out if a Novated Lease is right for you? Contact us today at Fleetcare for more information.