Novated leasing vs buying outright

What is a novated lease?

A novated lease is a salary sacrificing arrangement where the employee makes payments from their salary to pay for a car.

Those payments come from the employee's pre-tax salary which reduces their taxable income.

The lease will be for between 1 and 5 years, with the option of a final residual repayment to buy the car or to begin a new lease with a new vehicle.

What does it mean to 'buy outright'?

Although you may very well have enough cash savings to pay for the car upfront, by
buying outright we also mean using a car loan to pay for the car in full and then repay the loan.

Buying outright pros and cons

Novated leasing pros and cons

When is a novated lease worth it?

A novated lease suits someone who is:

• In a stable full-time job
• Needs a car for personal use
• Is considering an electric vehicle
• Wants the lease repayments and running costs included in the same payment

If you're planning to buy a vehicle for yourself anyway, a novated lease might be the best solution if you're employed with a salary. Because the repayments come out of your salary before you're taxed, the repayments actually cost you less than if you were to use your take-home salary for loan repayments.

Let's take a look:

Expert insight: Novated leasing helps you use cash strategically

"If you're purchasing an electric vehicle that qualifies for the FBT exemption - or you work for an FBT-exempt organisation - a novated lease is often significantly cheaper than paying cash. Even outside of that, it's worth looking at the lease in the context of your broader financial goals. Buying a car outright ties up tens of thousands of dollars that could otherwise be invested, offset against a mortgage, or used more strategically. A novated lease preserves your capital while potentially delivering strong tax savings - it's not just about the car, it's about your overall financial position."

Catherine Heyes

Chief operating officer, Fincar

When is buying a car outright worth it?

Buying a car outright is the better option if you are:

• Self-employed or freelance
• You're planning to switch jobs or retire soon
• You would want to sell the vehicle in a few years
• You want full control to modify the vehicle
• You have enough cash spare to buy outright without a loan
• You have enough cash spare to put down a large deposit and keep your interest repayments small

If you can buy a car with cash, assuming you won't put yourself in any financial difficulty by doing so, that avoids the additional charges of interest and fees.

Otherwise, buying a car with a loan can give you more flexibility with your repayments and what you do with your vehicle.

Because novated leasing is only for salaried employees, taking out a loan to buy a car may be the best option for self-employed or freelance workers, or if your employer doesn't offer novated leasing as an option.

What are the tax perks?

• Income tax: Because novated lease repayments come out of your pre-tax salary, you'll save money on income tax.
• GST: You don't pay GST on the cost of the vehicle or any associated running costs.
• Fringe benefits tax: If you choose to lease an electric vehicle and it falls under the luxury car tax threshold you won't have to pay fringe benefits tax.

Frequently asked questions about buying vs novated leasing

• Can I own the car after a novated lease?

  Yes. At the end of your novated lease term you have 2 options: start a new lease with a new vehicle or pay a residual balance to take ownership of the vehicle.

  There are a few considerations to bear in mind though when deciding whether or not to buy the car, including the tax implications. You'll have to start paying running costs out of your take-home pay and won't benefit from tax savings, all while your vehicle depreciates in value.

  
  See our full guide on this here.

• How will my credit score be affected with a novated lease or car loan?

  With both a novated lease and a car loan you are borrowing money. This means the finance providers will perform a credit check to assess your credit worthiness. This may affect your credit score briefly, but as you make repayments on time the score should correct and may even increase.

  Having this credit on your file may affect your borrowing power if you're intending to take out another form of credit, including a home loan.

• Is novated leasing only for news cars?

  No, novated leasing is an option for used cars as well. The car must not be over a certain age by the time the lease is scheduled to end and it must meet other vehicle specifications.

  Every novated leasing provider will have different criteria around leasing a used car so it's important to check.

  When you are buying a car you have much more flexibility in the type and age of the vehicle.

Written by

Rebecca Pike

Editor, Money

Rebecca Pike is Finder’s money editor, with over 7 years of experience in mortgages and personal finance. A frequent TV and radio commentator, she frequently appears on Sunrise and 7News, Today and 9News, as well as Sky News, Channel 10 and across radio and print. Rebecca previously served as Editor of Mortgage Professional Australia. She has a Master’s degree in Journalism as well as ASIC-recognised certifications in Tier 1 Generic Knowledge and Tier 2 General Advice Deposit Products, which comply with ASIC guidelines. See full bio

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