Getting a car loan vs novated lease is one of the most common situations most Aussies are torn in between when it comes to financing or securing their dream vehicle. Car loan vs novated lease – which of these car acquisition routes is right for you?
What is a Novated Lease and Why It’s Different from a Car Loan?
A Novated Lease is a type of car financing wherein every day running expenses as well as maintenance are incurred in a Pre-Tax and a GST free arrangement. This simply means that your salary where your monthly payments are deducted are tax reduced. Thus, you can enjoy a higher take-home pay that can be used for your fuel, car insurance, servicing, and other financial payments related to your vehicle purchase.
Your company who serves as the leasing entity of the vehicle to the car company. Thus, the company’s financial credentials are being scrutinized upon application and not your personal finances.
What makes a novated lease different from a car loan is that novated leases are salary deducted. It is secured by the company. In car loans, your consumer credit establishes your capacity and qualification for a car financing. Your integrity to pay this personal loan secures your loan. No running costs are included in your loan repayment.
Advantages of a Novated Lease Over a Car Loan
- A novated lease can help you save on the Good and Services Tax or GST of your vehicle purpose. GSTs have added tax levied on good and services that are sold/purchased for domestic use. The GST is usually remitted to the government by the business that offers or sell a good, in this case, your car dealership.
- Savings on GST can be also applied on petrol, maintenance and other service costs you may consume during the whole term of your lease.
- All other running costs such as insurance, servicing, roadside assistance, and repayments can be applied for tax reductions if the consumption of these consumables is within work purposes.
- Lease payments are directly deducted by your employer from your base salary (before tax deductions). Such salary packaging scheme is applied to your pre-tax salary.
- Your taxable income is reduced every tax pay cycle, thus extra cash you can allot on savings or other expenses. Salary sacrificing has such advantages.
- You can avail a high-end or more expensive car depending on the buying power of your company. Tapping into the fleet buying power of your company allows your employer to lease top of the line vehicles in a more favorable price tag.
- Novated leases can be arranged for both new and used cars. The lease can also be transferred to a new employer if you decide to work for a different company.
What Are the Disadvantages of a Novated Lease
- Novated leases require a balloon payment at the end of the lease. Most would trade the car at the end of the lease to be able to get a new car for a similar cost. However, this will require you to pay for a certain amount – an amount you would want to save up for.
- The amount of paperwork needed for a novated lease is quite hefty compared to a regular car loan, regardless of your purchase price.
- A novated lease is not always available in every organization. Such leasing options will also give your payroll person additional work via the monthly deductions that they need to enroll in the payroll system.
Top Reasons to Choose a Car Loan Over a Novated Lease
Novated lease is for some people, especially to those employees whose companies offer such benefits for their employees. However, a car loan is a preferred choice for most Aussies due to many advantageous reasons. Here are some of them:
- Depending on your financial and personal circumstances, and through an SPA, you can get your car loan approved as fast as 1 to 6 hours.
- Some car dealerships offer no deposit financing for people with good credit standing.
- You can enjoy fixed interests for car financing that has flexible loan terms up to 84 months. A lease term is only limited to 60 months or 5 years maximum.
- Additional payments to be able to repay your car financing early is possible but may include additional fees for early termination. You can always ask your car loan specialist about this.
- A car loan will not require your boss or payroll account to sign anything to process your application. Applying for car financing requires less paperwork compared to novated leases.
- Novates leased car do not allow you to personalize your vehicle as much as you want to do so. If you are a big fan of car modification, a car loan would be advisable for you. However, you would want to coordinate with your car insurance provider or finance company for changes you want to apply with your vehicle as to avoid any issues with your insurance.
- Car financing for people with bad credit is available through a bad credit car loan, there is no equivalent option for such in a novated car lease.
Disadvantages of a Car Loan over Novated Leases
- On top of your monthly payments when buying a car, you will also need to allow a budget for fuel, car registration, insurance and other maintenance costs involved in using your vehicle.
- Tax benefits and deductions that can be enjoyed in novated leases cannot apply with regular car loans.
- Goods and Service Tax claims cannot be applied to the purchase of the car as well as its running cost when finances through a car loan. Tax saving on car running costs is also not applicable.
- It is also not possible to reduce your taxable income through a car loan or a bad credit car financing, and other fringe benefit tax deductions – a feature available with novated leases.
Knowing the advantages and disadvantages of a novated lease and a car loan can help you narrow down your situation and which car financing option would be most applicable for you. Take note of extra charges and fees so you can include this as well with your budget.
A novated lease calculator and a loan repayment calculator can help you determine which is most cost-effective for you.
Still confused? A car loan specialist can help. Talk to an Intellichoice car loan expert today!