If you’re considering a new car in Australia, chances are you’ve come across the terms novated lease and car loan. While both help you drive away in a vehicle without paying the full price upfront, the structure, benefits and ownership terms are vastly different. So, what are the key differences between novated car leases and car loans in Australia?
A novated lease lets you salary-package a car through your employer, offering potential tax savings but without ownership during the lease. A car loan gives you full ownership from day one, with repayments made over time.
Being aware of the differences between novated car leases and car loans is crucial in choosing the right path for your personal or professional needs. Read on to understand more about their key differences and choose what’s right for your needs.
Quick Overview: Novated Lease vs Car Loan
Both novated leases and car loans are popular ways to finance a vehicle, but they work quite differently. The right choice depends on your employment setup, tax situation and whether you want to own the car outright.
- Novated Lease: An agreement between you, your employer and a leasing company where car payments are deducted from your pre-tax salary. You don’t technically own the car during the lease.
- Car Loan: A traditional financing method where you borrow money to buy a car and make repayments (plus interest) over time. You own the car from day one..
Need Help Choosing the Right Car Finance Option?
At Car Buyers Assist, we help Australians navigate the complexities of car finance, whether you’re weighing up a novated lease or a car loan. Our experts will explain your options clearly, ensure you understand the tax and ownership implications and match you with the right finance solution.
Call us at 1300 879 222 or visit our Contact Us page to get started today.
What Is a Novated Lease?
A novated lease is a three-way agreement involving you (the employee), your employer and a finance provider. The lease allows you to lease a car and have the repayments and running costs deducted from your pre-tax salary (salary packaging), potentially reducing your taxable income.
Key Features:
- Payments deducted from pre-tax income
- Employer handles payments on your behalf
- Lease terms typically range from 2 to 5 years
- May include running costs like fuel, servicing and registration
- End-of-term options: upgrade, buy the car or return it
What Is a Car Loan?
A car loan is a personal finance product where you borrow money from a lender to purchase a car. You make regular repayments over a fixed term until the loan is fully paid off. The car is either used as collateral (secured loan) or the loan is unsecured.
Key Features:
- You own the car from day one
- Interest is charged on the borrowed amount
- Loan terms range from 1 to 7 years
- No employer involvement
- Flexibility to buy from dealers or private sellers
Pros of Novated Car Leases
A novated lease can offer tax benefits and convenience, especially if it’s part of your salary package. Here are the key advantages worth knowing.
1. Potential Tax Savings
One of the biggest advantages is the ability to pay using your pre-tax salary, which may lower your overall taxable income and result in tax savings.
2. Convenience
All car-related costs, such as insurance, fuel and maintenance, can be bundled into one regular payment, making budgeting easier.
3. Fleet Discounts
Novated leases often provide access to fleet pricing, meaning you can buy the car at a discounted rate.
4. No Upfront Deposit
Generally, no deposit is required, which makes it easier to access a vehicle without upfront costs.
Cons of Novated Car Leases
Despite the perks, novated leases can be complex and come with conditions that may not suit everyone. Let’s look at the potential downsides.
1. Limited Flexibility
You must be employed by a company that offers novated leasing. If you change jobs, the lease becomes your responsibility unless your new employer agrees to take it on.
2. No Immediate Ownership
You don’t own the car during the lease period. At the end of the term, you may have to pay a balloon payment to own it.
3. Lease Exit Costs
Ending the lease early can come with significant financial penalties.
Pros of Car Loans
Car loans give you full ownership from the start and may offer more flexibility with the vehicle you choose. Below are some of the main benefits.
1. Full Ownership from Day One
You have legal ownership of the car as soon as the sale is complete, even while making repayments.
2. More Flexibility
Car loans can be used to purchase any vehicle, from new cars to used ones, through private sellers or dealers.
3. No Employment Restrictions
Unlike novated leases, you don’t need to rely on your employer. This makes car loans suitable for self-employed individuals, freelancers and casual workers.
4. Customisable Loan Terms
Choose your repayment schedule, loan duration and even your lender, giving you more control.
Cons of Car Loans
While car loans are a common option, they also come with financial commitments and risks. Here’s what to consider before applying.
1. No Tax Benefits for Personal Use
Car loans don’t come with salary packaging benefits unless used for business purposes.
2. Upfront Costs May Apply
Some lenders may require a deposit, increasing the initial out-of-pocket expense.
3. Total Interest Costs
Depending on your interest rate and loan term, the total cost of the car may end up significantly higher than its original price.
What Happens at the End of the Term?
When your lease or loan ends, you’ll face a few decisions or next steps depending on the agreement. The following are examples of what typically happens and what options you’ll have:
Novated Lease:
- Return the car.
- Pay a balloon payment and own it.
- Upgrade to a new lease vehicle.
Car Loan:
- Once all payments are made, the car is yours with no further obligations.
Novated Car Leases vs Car Loans: Which Option Is Right for You?
Ask yourself the following:
- Do you want to own the car immediately? Go with a car loan.
- Are you looking to reduce your taxable income and bundle costs? Consider a novated lease.
- Do you change jobs frequently or are self-employed? A car loan offers more flexibility.
- Are you employed and want convenience with minimal upfront cost? A novated lease might suit your needs.
Can You Transition Between the Two?
Yes. Some people start with a novated lease and later buy the vehicle outright. Others might refinance an existing novated lease vehicle through a car loan.
At Car Buyers Assist, we help clients navigate these transitions smoothly, with clear guidance on cost comparisons and timing.
Final Thoughts: Compare Before You Commit
Knowing the differences between novated leases and car loans is essential for making the right decision. While both have benefits, the right option depends on your job status, lifestyle and long-term financial plans. Still unsure what’s best for your circumstances? We’re here to help.
Talk to the Car Finance Experts Today
If you need clarity on which car finance option suits you, call Car Buyers Assist today at 1300 879 222 or visit our Contact Us page. Whether you’re comparing novated leases or traditional loans, we’ll walk you through every step of the process to ensure you choose the path that’s right for you.
Let’s make your car buying experience smooth, transparent and cost-effective.