Car loans are the most common way for Australians to finance vehicles, but salary sacrifice agreements like novated leases are growing in popularity. Before you make up your mind, though, it’s essential to understand how each one works and what its benefits are. Let’s walk through the pros and cons of each option to help you work out which is best for your needs!
The differences between novated leases and car loans
| Novated lease | Car loan | |
|---|---|---|
| Available to: | Eligible employees whose employer offers novated leasing | Any eligible applicant |
| Parties involved are: | You, your employer and your lease provider | You and your lender |
| Payments made by: | Employer, with pre-tax deductions from employee’s salary | Borrower, direct to lender |
| Term lengths of: | One to five years | One to seven years |
| Deposits are: | Unavailable | Available |
| Residuals are: | Mandatory and must meet the required minimum | Optional and come without a set minimum |
| Car running costs are: | Able to be included in your novated lease package | Able to be included in your loan amount (depending on your lender and borrowing power) |
| Tax benefits: | Reduced income tax, no GST on purchase price or running costs | Unavailable for personal-use car loans |
| You can use it: | For personal and commercial purposes, but designed for personal | For personal and commercial purposes (if 51% or more commercial, chattel mortgage should be taken out) |
| At the end of the term: | You can: 1. Pay the residual and buy the car 2. Sell or trade in the car to cover the residual 3. Refinance the residual and continue leasing the car |
You’re the full, unencumbered owner of the vehicle |
| When buying an EV: | Eligible vehicles are exempt from luxury car tax (LCT) and FBT (up to the LCT threshold) | Eligible vehicles are exempt from luxury car tax (up to the LCT threshold) |
| Usage restrictions are: | Annual kilometre allowance set at the beginning of your lease (which can be adjusted) | Not applicable |
The pros and cons of novated leases
Pros
-
Lower taxable income
You pay for your novated lease from your pre-tax earnings, so your taxable income is reduced. This means you’ll pay less income tax each year until the end of your term.
-
Claimable GST
The GST charged on the vehicle purchase is claimable, so you can enjoy further cost savings through your novated lease.
-
Include on-roads in your payments
Fully maintained novated leases allow you to pay for costs like servicing, insurance, fuel and more out of your pre-tax salary. This also increases your tax savings.
-
Payments managed by your employer
Your payments are made by your employer to the lease provider. This means you won’t have to worry about remembering to keep up with your instalments.
Cons
-
Only available through your work (and their providers)
Unlike car loans, you can’t pick and choose the best novated lease. If your work doesn’t offer novated leasing, you won’t be able to choose it.
-
Liable to cover FBT costs
Your employer will be charged FBT (unless you novate an eligible EV), which is usually passed onto you. However, the Employee Contribution Method (ECM) allows you to reduce your FBT liability through post-tax payments.
-
Sticking to your kilometre allowance
You’re limited in the amount you’re able to drive your car each year, as exceeding your agreed-upon limit could result in additional fees or require you to buy more mileage.
The pros and cons of car loans
Pros
-
Own your car from the outset
You’ll be the owner of the car from the date of purchase, giving you more freedom and security in the way you use it.
-
Optional deposits and residuals
You’ll have the freedom to make an upfront deposit and add/adjust the residual payment.
-
Longer terms on offer
You can take up to seven years to pay off your car loan, while novated leases are capped at five (unless you refinance your residual).
-
Simple finance structure
Car loans are only between you and your lender, so employment changes won’t have an impact once you’ve been approved.
Cons
-
No tax benefits
Consumer car loans don’t offer any tax benefits to borrowers. You’ll have to make the payments as normal directly to your lender.
-
On-road costs to be sorted by you
You won’t be able to have your car’s on-road costs sorted for you under a loan agreement. Some lenders will allow you to cover them in your loan sum, though.
-
Payments are higher
Because you’re covering the cost of the car as well as interest and fees, the amount you’ll be paying each week, fortnight or month will usually be more than on a lease.
How much do novated leases and car loans cost?
There’s a range of variables that can impact the cost of both novated leases and car loans. Here are a few examples for each:
Novated leases
- Choice of car
- Interest
- Finance and admin fees
- Annual mileage allowance
- Post-tax payment requirements
Car loans
- Interest
- Application and ongoing fees
- Make, model and condition of the car
- Deposit or residual payment (both optional)
- Additional early payments
Let’s take a look at a practical example of how much you might expect to pay overall with a car loan and a novated lease:
| Car loan | Novated lease | |
|---|---|---|
| Vehicle purchase price (inc. GST) | $46,793 |
$40,983 |
| Running costs over five years | $28,726 |
$26,115 |
| Finance cost (inc. interest and fees) | $52,795 |
$44,919 |
| Tax saved over five years | $0 | $9,765 |
| Overall cost comparison | $81,521 |
$71,034 |
| Overall cost comparison (inc. tax savings) | $81,521 |
$61,269 |
| Figures are for illustrative purposes only, based on annual gross salary of $80,000 and travelling 15,000km/year over a five-year term. Vehicle price of $46,793 drive away, fuel price of $1.85 (or $0.35/kWh). Compared to a five-year secured loan of 6.49% p.a. | ||
As you can see, with the reduced vehicle purchase price and finance cost, as well as the GST portion of the car’s running costs that are claimable, a novated lease for the above car could cost $10,000 less than a car loan. That’s also before you take into account the reduction in income tax, which adds close to $10,000 on top of that saving.
How interest works on novated leases vs car loans
Novated lease interest rates are pretty much the same as those for car loans: they’re based on your individual profile, with factors like your credit score, residential history and employment history all taken into account. Interest is built into your lease payments, so it’s paid by you each week or fortnight.
What on-road costs will I have to pay when financing my car?
The on-road costs payable for novated leases and car loans are pretty much the same. The difference is how you pay for them. The most common costs you’ll need to cover for your car are:
- Comprehensive car insurance
- CTP insurance
- Servicing costs
- Repairs
- Petrol or charging costs
- Vehicle registration
With a car loan, these costs will be paid for and managed by you. However, if you’re taking out a fully maintained lease, they’ll be included in your payments and managed by your leasing company. This means you’re paying for them out of pre-tax income, further reducing your income tax. Non-maintained leases will treat on-road costs the same way as a car loan, with everything to be paid post-tax.
Should I finance an electric vehicle with a novated lease or car loan?
Financing your electric vehicle with a novated lease could be the most cost-effective way to do so if that’s an option available to you. That’s because EVs are treated differently to petrol and hybrid cars when it comes to novated leases.
Although EVs, PHEVs, hybrids and fuel-efficient cars can all qualify for lower rates through green car loan products, the important thing about electric cars is that they’re exempt from fringe benefits tax (FBT) up to the luxury car tax (LCT) threshold.
What this means is that, if you buy an EV under $91,387 (the LCT threshold as of 2025-26), you won’t have to make post-tax contributions through the ECM. This can really send your overall savings through the roof, as the table below demonstrates:
| Car loan | Novated lease | Novated lease (EV) | |
|---|---|---|---|
| Vehicle purchase price (inc. GST) | $46,793 |
$40,983 |
$40,983 |
| Running costs over five years | $28,726 |
$26,115 |
$17,380 |
| Finance cost (inc. interest and fees) | $52,795 |
$44,919 |
$44,919 |
| Tax saved over five years | $0 | $9,765 |
$18,690 |
| Overall cost comparison | $81,521 |
$71,034 | $62,299 |
| Overall cost comparison | $81,521 |
$61,269 | $43,609 |
| Figures are for illustrative purposes only, based on annual gross salary of $80,000 and travelling 15,000km/year over a five-year term. Vehicle price of $46,793 drive away, fuel price of $1.85 (or $0.35/kWh). Compared to a five-year secured loan of 6.49% p.a. | |||
The fact that your net spend on a $40,983 car is $43,609 with all your finance and running costs included is pretty crazy. That’s why novated leases are so popular for people buying EVs. However, whether they’re the best option for you depends on things like your car budget, how much you’re earning and whether your work even offers novated leasing.
Novated lease vs car loan tax benefits
The main reason why novated leases are attractive to so many Australians is the fact that they can help you save on tax. This happens in a number of different ways:
- Income tax reduction: pre-tax contributions lower your taxable income, which obviously lowers the income tax you’re required to pay.
- Full/partial GST reduction on car purchase: the GST on the purchase of your car is claimable up to a maximum of $6,334 (as of the 2025-26 financial year). This means that if you purchase a car worth $69,674, your leasing company can claim the full GST credit. Buying above this mark still means you can receive the full credit, but you’ll have to pay the difference.
- GST claimable on running costs: for fully maintained leases, the GST on your car’s running costs is also claimable by your lease provider. This can include things like vehicle registration, car insurance, fuel and maintenance.
Car loans, on the other hand, don’t have any tax benefits unless you’re using your vehicle for business purposes. If you are, you’ll be able to claim the portion of your car’s GST and depreciation and your car loan’s interest and fees equal to that business usage. For example, if you use your car for work purposes 20% of the time, you can claim up to 20% of each of these expenses.
Residuals: novated leases vs car loans
At the end of every novated lease is a residual value, also known as a balloon or residual payment. The value is determined based on your car’s projected value at the end of your lease and must adhere to the ATO’s mandatory minimum values. As of September 2025, these are:
| Lease term | Residual value |
|---|---|
|
12 months
|
65.63%
|
|
24 months
|
56.25%
|
|
36 months
|
46.88%
|
|
48 months
|
37.5%
|
|
60 months
|
28.13%
|
You can cover your residual in several different ways:
- Paying the residual in full through savings or another loan, buying the car outright.
- Refinancing the residual value with your lease provider to extend your existing agreement and keep the same car.
- Selling or trading in your car to cover the residual and starting a new lease agreement with a different car.
- Selling or trading in your car to cover the residual and ending your lease agreement.
In contrast, car loan residuals aren’t mandatory and can be adjusted to your liking. Adding a residual will decrease the cost of your monthly payments but increase the overall spend on your loan.
For instance, a $50,000 car loan repaid over five years at 7.50% p.a. interest would cost $1,002 per month and $60,114 overall. If you added a 10% ($5,000) residual, your monthly repayments would fall to $933, but the total cost would increase to $60,977.
Which is better: a novated lease or a car loan?
Whether one option is better than the other depends entirely on your situation and what you want to get out of the deal. Let’s take a look at different circumstances and how they might impact your decision:
- You want to change your car over regularly:novated leasing allows you to switch between vehicles more easily than buying a different car every five years or so. The payment of the residual marks a clear end for your lease and the start of another.
- You want to maximise tax benefits:if you’re looking at reducing the tax you have to pay, the choice is clear. Novated leasing can deliver where a car loan can’t.
- You’re a low income earner:if you’re already in a low tax bracket and won’t stand to gain much from a novated lease, you might view a car loan as the simpler option.
- Your employer doesn’t offer novated leasing:when you don’t have the choice between the two, a car loan will always be an option available to you.
- You’re a casual worker on irregular hours or self-employed (without a salary):novated leasing relies on a consistent salary from which to deduct, so you’ll have to turn to a car loan if you don’t earn one.
- You’re buying an EV:there are significant benefits of novating an EV inside the LCT threshold. You could save yourself as much as $20,000 or more in overall costs over a five-year term.
- You’re buying a used car:most novated lease providers won’t accept used cars. However, Savvy is one of the few that does. You can speak to us about your finance options today!
