It’s a surprise to no one that car loans are the most popular way for people to finance their vehicle purchases in Australia. After all, between $4 billion and $5 billion has been taken out in new fixed term loans for road vehicles in every quarter since the September Quarter of 2023. It’s clearly the one that most people are aware of.
However, novated leasing has seen a surge in recent years thanks to the massive tax benefits they offer car buyers, especially for electric vehicles. So, how exactly is a novated lease different to a car loan?
The differences between novated leases and car loans
| Novated lease | Car loan | |
|---|---|---|
| Who can take one out? | Eligible employees whose employer offers novated leasing | Any eligible applicant |
| Parties involved | You, your employer and your lease provider | You and your lender |
| Party responsible for payments | Employer, with pre-tax deductions from employee’s salary | Borrower, direct to lender |
| Term lengths | One to five years | One to seven years |
| Residuals | Mandatory and must meet the required minimum | Optional and come without a set minimum |
| Usage restrictions | Annual kilometre allowance set at the beginning of your lease (which can be adjusted) | Not applicable |
Pros and cons of novated leases
Pros
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Lowers your taxable income
Part or all of your novated lease is paid out through your pre-tax earnings, via deductions by your employer. This reduces your taxable income, meaning you’ll pay less income tax throughout your term.
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Claimable GST
The GST charged on the vehicle purchase is claimable as a tax deduction by your lease provider, so you can enjoy further cost savings through your novated lease.
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Include on-road costs in your payments
Fully maintained novated leases allow you to have costs like servicing, insurance, fuel and more organised for you and paid out of your pre-tax salary. This also increases your tax savings.
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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
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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.
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Liable to cover FBT costs
Your employer will be charged fringe benefits tax (FBT). However, the Employee Contribution Method (ECM) allows you to reduce your FBT liability through post-tax payments. Eligible electric vehicles are exempt from FBT.
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Sticking to your kilometre allowance
You’re limited in the amount you’re able to drive your car each year, as exceeding your agreed limit could result in additional fees or require you to buy more mileage.
The pros and cons of car loans
Pros
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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.
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Optional deposits and residuals
You’ll have the freedom to make an upfront deposit and include or exclude a residual payment. Deposits allow you to reduce the loan size and save on interest, a luxury you won’t get with novated leasing.
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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).
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Simple finance structure
Car loans are only between you and your lender, so employment changes won’t have any impact once you’ve been approved.
Cons
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No tax benefits
Standard consumer car loans don’t offer any tax benefits to borrowers. You’ll have to make the payments as normal, directly to your lender.
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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 include their cost in your loan sum, though.
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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.
Novated leases vs car loans: cost
If you’re tossing up between the two, perhaps the most important idea to wrap your head around is how much each option will cost you overall. Here’s a rough cost breakdown of an equivalent car loan, non-EV novated lease and EV novated lease:
| Car loan | Novated lease (non-EV) | Novated lease (EV) | |
|---|---|---|---|
| Vehicle purchase price (inc. GST) | $46,793 | $44,416 | $44,416 |
| Running costs over five years | $28,726 | $26,115 | $17,380 |
| Finance cost (inc. interest) | $54,920 | $52,039 | $51,514 |
| Tax saved over five years | $0 | $11,180 | $24,440 |
| Overall cost comparison | $83,646 | $78,154 | $68,894 |
| Overall cost with tax saving | $83,646 | $66,974 | $44,454 |
| 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.
When it comes to EVs, that saving is increased significantly, as you can pay 100% of your instalments through pre-tax income. If the option is available to you and you’re in a position to take it on, it’s clear that novated leasing is the most cost-effective car finance method.
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.
Why are EVs so cheap to finance with a novated lease?
EVs are treated differently to petrol and hybrid cars when it comes to novated leases. Although EVs and PHEVs can qualify for lower rates through green car loan products, the important thing about fully-electric models is that they’re exempt from FBT up to the luxury car tax (LCT) threshold.
What this means is that, if you buy an EV up to $91,387, 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 demonstrates. The fact that your net spend on a $46,793 car is $44,454 with all your finance and running costs included is insane.
Novated leases vs car loans: 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 several 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 $6,334 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.
What happens at the end of a novated lease and car loan?
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 April 2026, 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 with your 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 for up to two more years.
- 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 loans are completed when you make your final payment. Once the debt is cleared, your lender’s interest in the vehicle is discharged and you’ll own it unencumbered. They can still come with residuals, but they 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!
Case study: choosing the right car finance option for your needs
When it comes to tossing up between the two, our very own Paid Digital Media Manager, Brad Thomas, went through the experience himself last year.
“With a little one on the way, my wife and I were looking to buy a new vehicle that was suitable as our family car in the long term”, he explained.
“I researched novated leasing and discussed it with the General Manager of Savvy Benefits, Adrian Taylor, and saw it as an opportunity to lower my taxable income and hopefully turn a depreciating asset into something that could save some money on tax.
“We decided to go with the novated lease for a brand-new Toyota RAV4, and we’re so glad we did. We love our new car, and the single weekly payment (including fuel and other running costs) makes it simpler to budget as well.”
