Is a Novated Lease better than a Car Loan?

There is really only one way to answer this question and it is with a resounding YES!

There are many elements to consider when choosing between the two financing options, so let’s examine the main ones in more detail:

Tax Deductions

The key to a novated lease is that the cost of the lease repayments is taken out of your pre-tax salary, essentially a tax deduction for each pay cycle.   This has the effect of lowering your taxable income so that you end up having your income tax calculated on a much lower amount.  The tax benefits that you derive as a result of a novated lease are quite substantial adding thousands of dollars back into your pocket over a secured car loan.   And the best news is that you get this tax benefit even if you do not use your vehicle for work.

Running Costs included

In addition, a fully managed novated lease also allows you to bundle in all of the operating costs of your motor vehicle, such as;

  • fuel
  • insurance
  • registration
  • servicing & repairs
  • replacement tyres
  • roadside assistance
  • even car washes

And these are also deducted from your pre-tax salary, adding to your income tax savings (as mentioned above).

A secured car loan does not provide you with the ability to bundle in any of the running costs of your vehicle.

GST

If you take out a secured car loan, then the repayments you make are calculated on the cost of the car including GST.  With such a loan, you are unable to claim back the GST component.

When utilising a novated lease the pre-tax salary deductions exclude GST and the financing of the car is net of GST.  So you save on the GST via a novated lease.

Residual

A novated lease allows you to include a balloon payment at the end of the lease term, otherwise known as the residual.

A secured car loan through the big four banks does not allow you to include a balloon in the structure of the loan.

A novated lease therefore has a lower cash repayment as it is structured with a residual and you don’t pay the balance down to nil.

The residual value is normally paid via trading in the car at the end of the lease term.

So whichever way you look at this, a novated lease is far and away a more effective method of financing a motor vehicle compared to a secured car loan.

For further information about novated leases check out our FAQs

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