Novated lease or car loan?

The two structures, briefly

With a car loan, you borrow money, buy the car, and own it. The loan is secured against the vehicle and you make repayments from your after-tax income. When the loan is paid, the car is yours with no further steps.

With a novated lease, a three-way arrangement is created between you, your employer and a leasing company. Your employer deducts the lease payments from your salary — a portion from pre-tax income — and typically bundles running costs like fuel, servicing, tyres, registration and insurance into a single deduction. At the end of the term there is a residual value you must deal with: pay it out, refinance it, or trade the car in.

Where the novated lease wins

The advantage is tax. Because part of the payment comes out of pre-tax salary, the higher your marginal tax rate the more it is worth. On a Sydney professional salary in the upper brackets, that saving can be substantial.

There is also a GST benefit on the purchase price, and the packaging of running costs has a real convenience value — one deduction covering fuel, servicing, tyres, rego and insurance, with no unexpected bills.

Where it goes wrong

The residual is what catches people. At the end of the term you owe a set amount, and if the car is worth less than that, the shortfall is yours. It is not a surprise if you have planned for it, and a nasty one if you have not.

The bigger risk is employment. The lease is novated to your employer. If you change jobs, the obligation typically reverts to you personally, and you are left paying it from after-tax income without the packaging benefit that justified it. If your role is uncertain, or you are likely to move within the term, that risk deserves real weight.

Finally, novated leases are not always as cheap as the headline saving suggests. Management fees, the interest rate embedded in the lease, and the price at which the vehicle is sourced all affect the true cost, and they are less visible than a car loan's comparison rate.

• Ask for the full cost breakdown — management fees, the effective interest rate, and the residual
• Compare against a car loan on total cost over the same period, not on the monthly deduction
• Consider what happens if you leave your job mid-term
• Get advice from your accountant; the tax outcome depends on your circumstances

A rough rule of thumb

A novated lease tends to suit someone on a higher marginal tax rate, in stable employment, who drives enough to make packaged running costs worthwhile, and who is comfortable changing vehicles at the end of the term.

A car loan tends to suit someone on a lower marginal rate, in less certain employment, who wants to own the vehicle outright and keep it well beyond the loan term. Neither is universally better, and anyone telling you otherwise is selling one of them.

Common questions

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