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Reviewed by When it comes to financing your car, two of the most popular options are novated leasing and car loans. Before you make up your mind, though, it’s essential to understand how each one works and its benefits. We’ll walk you 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 or hybrid: | 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) |
The Pros and Cons of Dealer Finance and Car loans
- You pay for your novated lease from your pre-tax earnings, so your taxable income is reduced. This means it saves on income tax each year until the end of your term.
- Additionally, the GST charged on the vehicle purchase is claimable, so you can enjoy further cost savings through your novated lease
- Fully maintained novated leases allow you to include costs like servicing, insurance, fuel and more in your package. These also come out of your pre-tax salary, saving more money in the process.
- In many cases, your payments will be lower than what you’d pay on a car loan. This is partly due to the residual payment at the end of your term.
- 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.
- You’ll be the owner of the car from the date of purchase. This can give you more freedom and security in the way you use it.
- You’ll have the freedom to make an upfront deposit, trade in your current vehicle or add/adjust a balloon payment, which reduces your monthly repayments and can save you money overall (in the case of deposits and trade-ins).
- You can take up to seven years to pay off your car loan, while novated leases are capped at five. The only way to extend your lease is by refinancing your residual.
- There are specialist lenders who may be able to help you buy a car up to 20 years or older. In contrast, you’re restricted to vehicles no older than 12 to 15 years at the end of your novated lease term in most cases.
- Car loans are only between you and your lender, so employment changes won’t have an impact once you’ve been approved.
- Unlike car loans, you can’t pick and choose the best novated lease. If they don’t offer novated leasing, you won’t be able to choose it. You’ll also only be able to go with the provider your employer is partnered with.
- Paying the lump sum residual at the end of your lease isn’t always easy if you want to keep your car.
- Novated leases are considered a fringe benefit, meaning your employer will be charged FBT (unless you novate an EV or PHEV). This is usually passed onto you, increasing the overall cost, but the Employee Contribution Method (ECM) allows you to reduce your FBT liability through post-tax payments.
- The car is owned by your leasing company until you make the final residual payment. As a result, there are restrictions on the modifications you can make to the car during your term.
- Consumer car loans don’t offer any tax benefits to borrowers. However, if you purchase a car for your business using a chattel mortgage, you can claim for interest, GST and vehicle depreciation.
- 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 their cost in your loan sum, though.
- If you default on your car loan payments, you’re at risk of having your car repossessed. However, this risk may also be present with novated leases.
- Your car’s value can fall below the outstanding balance of your loan during your repayment period. If you decide to sell your car before the end of your term, you’d find yourself out of pocket.
Cost and tax calculation: novated leases vs car loans
Here’s an example of how much you might expect to pay overall with a car loan and a novated lease:
| 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 |
All 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 $1.65 (or $0.35/kWh). Compared to a five-year secured loan of 6.49% p.a.
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 March 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
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 $1,001.90 per month and $60,114 overall. If you added a 10% ($5,000) residual, your monthly repayments would fall to $932.96, but the total cost would increase to $60,977.
Interest, fees and on-road costs: novated leases vs car loans
This is the area most similar between the two. Your interest rate on either product will depend on a range of factors. These include things like your credit score, employment history, whether you’re asset-backed (such as owning a home) and the stability of your finances, as well as the provider themselves. Fees are also similar, with both typically charging ongoing monthly service fees in addition to initial establishment fees.
Where the two differ is in terms of on-road costs. You have the option to include these in your fully maintained lease payments, so you don’t have to organise them yourself. Some of these costs are:
- Comprehensive car insurance
- CTP insurance
- Servicing costs
- Repairs
- Petrol or charging costs
- Vehicle registration
These costs are all also taken out of your pre-tax salary and come with claimable GST, saving you further money on income tax in the process. You may also opt for a non-maintained lease, where you organise all of these yourself. While less convenient, it allows you to shop around and compare insurance and repair options, for example.
With a car loan, you can also extend you amount to cover the cost of these expenses. However, they won’t be sorted for you like they would be on a fully maintained lease.
Bad credit: novated leases vs car loans
Having bad credit doesn’t mean a novated lease is out of the question for you. Providers will assess applications on a case-by-case basis. They’ll look at things like your employment, job stability, income and the nature of your bad credit when making their decision. You may have to meet your provider’s minimum credit score requirements.
There are also plenty of lenders in the market who specialise in offering car loans to those with less-than-perfect credit. As long as you pass all your lender’s checks, you can still be approved.
Do novated leases affect your credit score like car loans do?
In short, yes – novated leasing does impact your credit score. Like a car loan or commercial lease, your payments and credit behaviour are recorded on your credit file throughout your term. Timely payments can help your score grow, while late payments or defaults (which are virtually non-existent in novated leasing) do the opposite.
Which is better: a novated lease or 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 or so years. The payment of the residual marks a clear end point for your lease and 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 or self-employed (without a salary): novated leasing relies on a 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!
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