Novated lease vs. car loan – which one to choose?

A novated lease is a three-way arrangement between you, your employer, and the lender. It is set up within your income as a component of a salary sacrifice arrangement. A fully maintained novated lease also allows you to include running expenses such as fuel and maintenance within the arrangement.

When you opt for a novated lease, you borrow from the leasing company and pay off the amount over a set period. The payments are made from your salary over the lease period, which is generally between two and five years.

At the end of the novated lease period, there is a residual amount to pay, and there are a few ways in which you can settle it. You can opt for a new lease and exchange your car for a new one. Alternatively, you can extend the lease and refinance the balance. Lastly, you can pay the residual amount and purchase the vehicle outright.

A car loan is a specific type of loan that you can use to buy a new or a used vehicle if you can’t afford to pay for it upfront. There are different types of car loans that can be taken out for buying a new or a used vehicle. The average car loan term is about seven years. ​​During the term, you’ll need to make regular repayments to pay off the lump sum you borrowed (the principal), as well as the interest accrued on it. 

Your car may be used as collateral to secure the loan if you opt for a secured car loan. Even though the interest rate on a secured loan is often lower than an unsecured loan, the lender may repossess the car to recover the loan if you delay or miss repayments. 

A novated lease can help you save, but you need to compare the pros and cons before deciding. Some of the factors you should consider when choosing between novated leases vs. finance are:

• Duration for which you will keep the car; generally, the longer you retain the vehicle, the more you’ll save by buying instead of leasing it. This is because a car is a depreciating asset, and its value can reduce by as much as 60 per cent in the first few years.
• The wear and tear of the car will be lower if you drive less than the agreed distance in the lease. So you may pay higher maintenance costs than necessary.
• Depending on your total taxable income and the cost of the car, leasing can be a better option as tax savings can be significant over time.
• You can consider a lease if your employer is ready to set up a salary sacrifice arrangement for buying a car.
• You can consider a loan if your savings are sufficient for a deposit, and monthly income will cover the repayments.
• Some leasing companies don’t allow you to choose the car insurance policy, so you may not get the coverage and premium you want.
• If you lose your job, the novated lease is converted to a regular consumer lease, and the tax deduction and maintenance benefits are lost.

Talk to an independent advisor and calculate your monthly payments before deciding.