Novated Lease vs Car Loan: Which Option Is More Cost-Effective?

Choosing the right loan when buying a car can result in huge savings over time. If your employer offers a car fringe benefit, you may be wondering whether you'll save more money from either a novated loan or a car loan.
Before we compare the two finance products, it’s important to understand how both novated loans and car loans work. This guide provides a brief overview of each type of loan and a detailed comparison using examples.
What’s the Difference Between A Car Loan And A Novated Lease?
A car loan and a novated lease can both be used to finance a vehicle. However, that’s where the similarities end.
A car loan is a financial agreement for the purchase of a car. The borrowed amount is then repaid over the loan’s term, plus interest. With a car loan, you own the vehicle as soon as it is purchased.
A novated lease is an agreement between you, your employer, and the lease provider. The car is purchased and leased to you for personal use. Your employer deducts the repayment amount from your salary (before tax) and sends it to the lease provider. At the end of the lease term, you can:
- Make a lump sum payment known as a balloon payment to the lease provider to take ownership of the vehicle. You do not own the vehicle until this payment is made.
- Extend the lease duration for a longer term.
- Trade in the vehicle for a new lease on another vehicle.
Novated Lease Vs Car Loan - A Detailed Cost Comparison
The main benefit of a novated lease is savings on tax. Novated lease payments are deducted directly from income before tax is applied, resulting in a reduction of your taxable income. Additionally, GST is not applied to the purchase price of the vehicle when taking out a novated lease.
A novated lease can also result in more savings if you opt for an electric vehicle. The Australian Government’s electric car discount provides an exemption for the cost of fringe benefits tax when leasing an electric vehicle through a novated lease.
Let’s take an example using the following:
- Purchase vehicle - Tesla Model Y with a driveaway price of $58,900
- Employee’s annual salary - $100,000
- Interest rate - 6.1%
- Lease term - 5 years
- Residual (balloon) payment percentage - 30%
Tesla Model Y (Electric Vehicle) |
Car Loan |
Novated Lease |
Vehicle driveaway price |
$58,900 |
$58,900 |
Upfront cost with GST applied |
$58,900 |
$53,546 (no GST payable) |
Weekly payable costs |
$339.10 |
$197.50 |
Residual payment |
$0 |
$17,670 |
Total cost over 5 years |
$88,166 |
$68,630 |
Total cost savings |
$19,536 (22% difference in cost) |
A novated lease for an electric vehicle like the Tesla Model Y saves nearly $20,000 compared to a regular car loan.
Choosing Between A Novated Lease Vs A Car Loan
It’s clear a novated lease saves more tax than a car loan. However, your employer must offer it as an option.
There are considerations when deciding between a novated lease and a car loan.
Ownership
An unsecured car loan allows you to own the vehicle from day one. With a novated lease, you only own the vehicle after you pay the residual amount. Owning the car outright gives you more control over how you use it without having to think about how your employment may affect ownership.
Flexibility
A novated lease gives you the option to own the vehicle at the end of the lease or swap it for a new one through a new lease, making it ideal for those who like to change cars every few years.
Repayments
A car loan gives you more control over repayments and personal finances, and no lump sum payment at the end of the term. You may be able to add a balloon payment to a car loan with your lender to reduce the interest cost. With a novated lease, the repayments are deducted from your salary and the balloon payment is mandatory (if you want to own the vehicle).
If you’ve decided to go with a car loan, we recommend using a car loan broker to find the best financing for you. At Before U Loan, we have a list of approved loan brokers that can search and compare the best car loans from multiple lenders across Australia.
beforeuloan.com is backed by Australia's leading national association for finance and mortgage brokers, FBAA. Brokers ensure loan customers like you have choice, transparency and confidence in the market.
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