Novated Lease vs Traditional Car Finance

Novated leasing is an increasingly popular choice when it comes to car finance. But how does it compare to traditional car finance? Firstly we’ll take a look at what exactly is involved in this type of lease, and then see how it compares to a traditional car loan.

What is a Novated lease?

Essentially, a novated lease is a form of salary packaging / salary sacrifice whereby your lease payments and other related costs such as car insurance, registration, fuel cards, and/or running and maintenance costs are deducted from your pre-tax salary by your employer. This means you don’t pay GST on these charges due to your employer’s tax status, and it also lowers your taxable income, thus the amount of income tax you pay. This can save you thousands over the term of your lease.

A Novated Lease is a three-way arrangement between you, your employer and a financier, such as a fleet management company. Your monthly repayments are invoiced by the financier to your employer and your employer then deducts them from your pre-tax salary.

How does a novated lease compare to a car loan?

A car loan differs from a novated lease in a number of ways:

Who’s involved?

While a novated lease is a three way agreement, a personal car loan is an agreement solely between you and your bank or financial institution, so all the repayment responsibilities fall on you. The bank lends you the money to purchase the car and you repay the bank over a certain term with interest.

Interest

The interest on a car loan can be fixed or variable. Fixed meaning it remains the same throughout the term of the loan, and variable meaning it can go up or down depending on how the market fluctuates. The interest on a novated lease is generally fixed.

Who owns the car?

At the end of the loan term you will own your car, whereas with a novated lease you will not own the car, but you may be able to come to an agreement by which you can pay a lump sum to buy the car from the financier at the end of the term.

What do my repayments cover?

Your car loan repayments only cover the cost of the car, so you need to budget for your insurance, running and maintenance costs separately, and you must pay the loan repayments and all of these charges from your post-tax salary. However, novated lease payments can cover all of these costs in one and are taken from your pre-tax salary.

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Faith is a guest writer from Perth Western Australia. Find the right exercise equipment you can use to help reach your goals, visit www.orbitfitness.com.au for more fitness tips.

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