Novated Leasing vs. Buying a Car – Which One Saves You More?
1. Understanding the Key Differences
There are three primary ways to acquire a car:
- Novated Lease – A salary packaging arrangement where lease payments and running costs are deducted from pre-tax salary.
- Buying with Cash – Paying the full purchase price upfront to own the vehicle outright.
- Car Loan – Borrowing money to purchase the car, repaid over time with interest.
Comparison Table
| Factor | Novated Lease | Buying with Cash | Car Loan |
|---|---|---|---|
| Ownership | Lease the car, option to buy later | Immediate full ownership | Own after loan is repaid |
| Tax Benefits | Pre-tax savings & GST exemptions | No tax benefits | No tax benefits |
| Running Costs | Bundled into payments | Paid separately | Paid separately |
| Upfront Costs | No deposit required | Full purchase price upfront | Deposit often required |
| Flexibility | Upgrade, buy, or return at lease-end | Must sell or trade in to change cars | Loan terms fixed |
2. The True Cost of Buying a Car Outright
Buying a car with cash may seem like the simplest option, but it comes with financial drawbacks.
Large Upfront Cost
Purchasing a car outright requires a significant cash outlay, which may limit available funds for other investments or savings.
3. Car Loan vs. Novated Lease – Which One Costs Less?
Car loans provide an alternative for those who cannot pay outright, but they often come with higher long-term costs.
4. Cost Example: Car Loan vs. Novated Lease on a $50,000 Vehicle
| Scenario | Car Loan (5-Year Term at 6% Interest) | Novated Lease (5-Year Term, Salary Packaging Applied) |
|---|---|---|
| Monthly repayment | $966 | $850 (pre-tax) |
| Total cost after 5 years | $57,960 | GST savings: $4,500 on purchase price |
5. The Advantages of Novated Leasing
- Lower taxable income
- GST savings
- Fixed running costs
- Flexibility
- No large upfront payment
6. Is Novated Leasing Worth It? Key Considerations
When Novated Leasing is Worth It:
- If tax savings can significantly lower costs.
- If predictable expenses and bundled running costs improve cash flow.
- If frequent car upgrades are preferred.
7. How to Decide – Which Option is Right for You?
Choose Novated Leasing If You:
- Want to save on tax and pay for your car with pre-tax salary.
- Prefer lower upfront costs and bundled running expenses.
- Like the flexibility to upgrade, buy, or return the car at lease-end.
8. Next Steps
Both novated leasing and buying a car have their advantages, but for employees and business owners, novated leasing often provides the most tax-effective and flexible financing option.
Key Takeaways:
- Buying outright offers full ownership but requires a large upfront payment.
- Car loans are costly due to interest and lack of tax benefits.
- Novated leasing provides tax savings, lower upfront costs, and bundled expenses, making it the best choice for many employees.
