Novated lease vs. car loan: all the facts

How is a novated lease different from a car loan?

In the car finance game, two popular options for getting behind the wheel are a traditional car loan and a novated lease (aka salary packaging your car).

With a car loan, you borrow money from a lender and chip away at the repayments until the car’s all yours. Simple. But repayments, interest and ongoing running costs like fuel, servicing and insurance are generally paid from your after-tax income.

A novated lease works a little differently; you lease the car and roll many of the eligible running costs into one handy regular payment. Think fuel or charging, rego, insurance, servicing and tyres – all bundled together in a nice, budgetary bow.

And here’s where things get interesting: unlike a traditional car loan, a novated lease could unlock some pretty cool tax savings. Depending on your circumstances, those tax benefits might leave more money in your pocket each year – which is why many Aussies are taking a closer look at novated leasing.

Is a car lease different to a novated lease?

Yep – despite the similar names, a car lease and a novated lease are two different ways to get behind the wheel.

A car lease is a finance set-up where a leasing company buys the vehicle and leases it to you for an agreed term. You make regular payments to use the car, and if you’re keen to own it at lease end, you'll usually need to pay a residual (or balloon) amount.

Car leases are often used by businesses and generally work best when the vehicle is used primarily for work purposes.

A novated lease, on the other hand, adds a salary packaging twist. It's a three-way agreement between you, your employer and a finance provider. Your lease repayments and eligible running costs – think fuel or charging, insurance, rego, servicing and tyres – are bundled into convenient payroll deductions throughout the year.

The real bonus? Those payments can be made from a mix of before- and after-tax salary (or fully pre-tax for eligible EVs), which could help you save on tax while making car costs easier to manage.

What is a car loan?

A traditional choice for financing a vehicle, car loans suit Aussies with steady incomes who aren’t ready to cover the full purchase price upfront, instead spreading the cost and slowly building towards ownership.

Here's how it works: your lender provides the funds to buy the car, and the vehicle typically acts as security for the loan. You then make repayments over an agreed term – often around five years – until the loan is paid off and the car is all yours.

Along the way, you'll also pay interest and any applicable fees, which can vary depending on the lender and loan type.

It’s also worth keeping in mind that your car repayments, fuel, insurance, rego, servicing and other running costs are paid from your after-tax income – which is where options like novated leasing start to look interesting.

Car loans: the pros and cons

Pros

• Plenty of choice. Most types of lenders offer car loans, giving you lots of options to compare.
• More flexible lending. Some lenders may cater to borrowers with less-than-perfect credit histories, which can make getting approved a little easier.
• Fewer vehicle restrictions. Compared to some finance options, car loans can offer greater flexibility around the type of vehicle you choose, whether that's a family SUV, ute or something with a bit more oomph.

Cons

• Fees can add up. Depending on the lender, you may encounter application fees, ongoing account fees or early repayment costs.
• You'll pay the full GST amount. Unlike a novated lease, there are generally no GST savings on the vehicle purchase price.
• Everything comes from your after-tax income. Loan repayments, interest and vehicle expenses are typically paid using dollars that have already been taxed.
• Running costs aren't bundled in. Fuel, insurance, registration, servicing and tyres all arrive as separate bills throughout the year, so you'll need to budget for them as they pop up.
• Your credit score matters. A lower credit score could mean higher interest rates, which may increase the overall cost of the loan.

What is a novated lease?

A novated lease is a three-way agreement between employee, employer and financier that delivers a salary-powered way to get on the road and keep your car costs under control.

Instead of juggling car expenses as they pop up throughout the year, your lease repayments and eligible running costs are bundled into regular payroll deductions. Better yet, those payments are made from a mix of before- and after-tax salary (or fully before-tax for eligible EVs), which could mean some sweet tax savings.

There’s another perk, too: unlike buying a car outright, you could benefit from GST savings on the purchase price (up to a savings cap of $6,353*), helping to make your next set of wheels more affordable from day one.

When your lease term wraps up, you've got options. You can make the residual payment and keep the car, trade up to a newer model and start a fresh lease, or explore other end-of-lease pathways.

In short, a novated lease could be the go if you're looking to:

• Potentially pay less tax
• Make the switch to an EV more affordable
• Bundle car expenses into one regular payment
• Take the guesswork out of budgeting for things like fuel, insurance, registration and servicing

The Electric Car (EV) Discount and novated leasing

If the tax savings on a novated lease sound good, they can be even better when you jump into an eligible electric vehicle (EV).

Thanks to the government's current EV incentives and novated leasing, eligible EVs can access some seriously attractive tax benefits. In many cases, your entire lease payment can be made from your before-tax salary, which can boost the potential savings compared to a standard novated lease.

That means more of your pay goes towards your car before tax is applied – helping to make the switch to an EV more affordable than many people realise.

There is a limit, though. These benefits currently apply to eligible vehicles up to a value cap of $91,661#.

As with any government incentive, the rules can change. The government recently announced updates to EV Discount eligibility, with changes being introduced progressively over time. you can read more here.

Novated leases: the pros and cons

Pros

• Potential tax savings. Lease repayments (and often eligible running costs) can be paid from your pre-tax salary, which could leave more money in your pocket.
• GST savings. You may save GST on the vehicle purchase price, up to the applicable ATO limit.
• One payment, less hassle. Fuel or charging, insurance, rego, servicing and tyres can often be bundled into one regular payment, making budgeting a breeze.
• EV-friendly perks. Eligible electric vehicles can unlock additional tax benefits and FBT exemptions.
• No hefty upfront deposit. In many cases, you can get on the road without needing a large lump sum upfront.

Cons

• It's not yours straight away. You won't own the car during the lease term and will typically need to make a residual payment if you'd like to keep it at the end.
• Changing jobs can complicate things. If you leave your employer or move to a workplace that doesn't offer novated leasing, your arrangement may need to change.
• Rates may not always be the lowest available. Because leases are arranged through a provider's lending panel, there may be cheaper finance options elsewhere in the market.
• A little paperwork may pop up. Depending on your provider, you might need to submit receipts for certain expenses to be reimbursed.