How a novated lease works
A novated lease is an agreement between you, your employer and a leasing company. Your employer pays the lease and running costs from your salary, part of it before tax, which lowers your taxable income.
Electric cars below the luxury car tax threshold are exempt from fringe benefits tax, so the whole lease can come from pre-tax pay. That makes novated leases especially good value for eligible electric cars.
At the end of the lease you pay a residual (a lump sum set by the tax rules) to keep the car, or you can refinance it or trade it in for a new lease.
- Tax savings that can make it cheaper than a loan, especially on higher incomes.
- Running costs such as fuel or charging, servicing, tyres and registration can be bundled in.
- No deposit is usually needed.
- You need an employer that offers salary packaging.
- If you leave your job, the lease stays with you and you may need to pay it from after-tax income or pay it out.
- A residual payment is due at the end.
How a car loan works
You borrow to buy the car and repay the lender from your after-tax income. The car is usually the security, but it's yours, and your employer plays no part.
- Simple, and not tied to your job.
- No residual unless you choose a balloon payment.
- No limits on kilometres or wear and tear.
- No tax savings, and running costs are paid separately.
Which is better?
A novated lease tends to suit employees on higher incomes who plan to stay with their employer for the lease, and anyone getting an eligible electric car. A car loan suits people who want simplicity, may change jobs, or are buying an older car. Ask for a full quote for both, including the residual and running costs, and compare the total.