Novated lease vs car loan: What’s the difference?
Both a novated lease and a car loan let you finance a new or used vehicle for personal use, with fixed repayments over an agreed term. The main differences are how payments are made, what costs are included, flexibility, and potential tax benefits.
Novated lease
A novated lease is a car finance arrangement where your employer makes lease payments from your pre-tax salary. It can include running costs like fuel and servicing, and may offer tax benefits.
Car loan
A car loan is where you borrow money from a lender to buy a vehicle and make regular repayments from your after-tax income. You own the car from day one, and running costs are separate.
Novated lease vs car loan basics explained
How does it work? | |
Novated lease | A salary-packaged car lease where your employer makes payments on your behalf using pre-tax and post-tax income |
Car loan | You borrow money from a lender to buy a vehicle and repay it over time |
Secured or unsecured finance | |
Novated lease | Generally secured by the car being financed |
Car loan | Secured car finance is the most common option, but there are unsecured loans too |
Finance term | |
Novated lease | 1–5 years |
Car loan | 1–7 years |
Who owns the vehicle? | |
Novated lease | Novated lease company owns it during the lease (you can buy it at the end by paying the residual value) |
Car loan | You own the car from day one, but the lender can reclaim if secured and you default on the loan |
How is the finance arranged? | |
Novated lease | Three-way partnership between employee, employer and the novated lease provider |
Car loan | Arranged directly with a lender or through a car loan broker |
What do the repayments cover? | |
Novated lease | Unlimited use of the vehicle plus fuel/charging, servicing, tyres, registration, car insurance |
Car loan | The vehicle itself (some unsecured car loans may let you borrow extra for other costs) |
Incentives and tax implications | |
Novated lease | Income tax savings via salary packaging and Fringe Benefits Tax (FBT) concessions (for eligible EVs) |
Car loan | No tax benefits unless used for business |
Restrictions or limitations | |
Novated lease | You must stay with a participating employer; early exit can be costly; only passenger vehicles with a payload under one tonne qualify |
Car loan | Used car loans have an age limit (typically no older than 15 years), some lender-specific conditions may apply |
Interest rates | |
Novated lease | Typically start from 7.00% p.a., but will depend on your situation |
Car loan | Ranging from 5.50% p.a. to 20% p.a. based on your borrower profile |
Fees | |
Novated lease | Set up fees, monthly admin fees and early exit fees may apply |
Car loan | Application fees, monthly fees, early repayment fees and early exit fees may apply |
Balloon payment | |
Novated lease | Yes, otherwise known as a residual payment at the end of the lease |
Car loan | Option to add a balloon payment by some lenders |
Eligibility | |
Novated lease | Must be employed with an employer willing to participate and meet credit criteria |
Car loan | Meet lender income, credit and ID requirements (tighter for unsecured loans) |
| Novated lease | Car loan | |
|---|---|---|
How does it work? | A salary-packaged car lease where your employer makes payments on your behalf using pre-tax and post-tax income | You borrow money from a lender to buy a vehicle and repay it over time |
Secured or unsecured finance | Generally secured by the car being financed | Secured car finance is the most common option, but there are unsecured loans too |
Finance term | 1–5 years | 1–7 years |
Who owns the vehicle? | Novated lease company owns it during the lease (you can buy it at the end by paying the residual value) | You own the car from day one, but the lender can reclaim if secured and you default on the loan |
How is the finance arranged? | Three-way partnership between employee, employer and the novated lease provider | Arranged directly with a lender or through a car loan broker |
What do the repayments cover? | Unlimited use of the vehicle plus fuel/charging, servicing, tyres, registration, car insurance | The vehicle itself (some unsecured car loans may let you borrow extra for other costs) |
Incentives and tax implications | Income tax savings via salary packaging and Fringe Benefits Tax (FBT) concessions (for eligible EVs) | No tax benefits unless used for business |
Restrictions or limitations | You must stay with a participating employer; early exit can be costly; only passenger vehicles with a payload under one tonne qualify | Used car loans have an age limit (typically no older than 15 years), some lender-specific conditions may apply |
Interest rates | Typically start from 7.00% p.a., but will depend on your situation | Ranging from 5.50% p.a. to 20% p.a. based on your borrower profile |
Fees | Set up fees, monthly admin fees and early exit fees may apply | Application fees, monthly fees, early repayment fees and early exit fees may apply |
Balloon payment | Yes, otherwise known as a residual payment at the end of the lease | Option to add a balloon payment by some lenders |
Eligibility | Must be employed with an employer willing to participate and meet credit criteria | Meet lender income, credit and ID requirements (tighter for unsecured loans) |
Pros and cons of a novated lease
Pros
- You can save on income tax because lease payments (and often running costs) are made from your pre-tax salary.
- You save GST on the vehicle purchase price up to a limit of $6,334 (for financial year 2025/26).
- Running costs (fuel/charging, insurance, maintenance, registration, tyres, etc.) can be bundled into one payment, simplifying budgeting.
- It can be particularly cost-effective for electric vehicles thanks to additional incentives and tax/FBT exemptions.
- You often don’t need a large upfront deposit to access a novated lease, lowering the barrier to getting a car.
Cons
- You technically don’t own the car until you pay the residual (balloon) payment at the end – it remains owned by the leasing company until then.
- If you change or lose your job (or your employer doesn’t offer novated leasing), you may lose the arrangement or be responsible for repayments yourself.
- Because the lease is arranged by a leasing company with a limited lender panel, you might not get the lowest possible interest rates compared to shopping around with a loan.
- There may be some admin involved, like submitting receipts for replacement tyres to get reimbursed.
Our page on novated lease pros and cons takes a deeper dive into how this type of car finance works and who it suits. Because everyone’s situation is different, it’s worth getting personalised guidance from a tax accountant or financial adviser to see if a novated lease is a smart move for you.
And if you’re seriously considering leasing a car, having a chat with a novated lease specialist can help you compare your options and understand what’s genuinely best for your circumstances.
Pros and cons of a car loan
Pros
- Wider choice as most banks, credit unions and specialist lenders offer car finance.
- Lower interest rates may apply on secured loans to borrowers with a good credit history or those looking to finance a green car.
- More options for borrowers in trickier financial positions through bad credit car loans or low doc car loans.
- Fewer restrictions on what kind of car you can finance, like utes with a payload above one tonne.
Cons
- Typically come with higher fees such as application, ongoing and early payout costs. While the comparison rate helps you compare loans, it doesn’t factor in early payout costs
- You’ll pay the full GST on the purchase price, and there’s no scope to save on income tax.
- The loan amount is capped based on the lender and your overall financial situation.
- A lower credit score can mean higher interest rates, additional fees and potential restrictions on your loan.
Novated lease vs car loan: EV cost comparison
| Novated lease | Car loan | |
|---|---|---|
Driveaway price (BYD SEALION 7 Premium) | $54,900 | $54,900 |
GST saving on purchase price | $4,991 | n/a |
Monthly cost (finance and/or running costs) | $864 | Loan: $1,087 Running costs $325 Total: $1,412 |
Cost over 5 years | $51,940 | $84,720 |
Residual payment | $15,433 | n/a |
Total cost to own car and run for 5 years | $67,373 | $84,720 |
Cost difference | $17,347 | |
Total tax saving over 5 years | $37,042 | n/a |
Novated lease vs car loan: Non-EV cost comparison
| Novated lease | Car loan | |
|---|---|---|
Driveaway price (2025 Mitsubishi Outlander ES 5 Seat) | $45,160 | $45,160 |
GST saving on purchase price | $4,105 | n/a |
Monthly cost (finance and/or running costs) | $1,048 | Loan: $916 Running costs $400 Total: $1,316 |
Cost over 5 years | $62,880 | $78,960 |
Residual payment | $12,704 | n/a |
Total cost to own car and run for 5 years | $75,584 | $78,960 |
Cost difference | $3,377 | |
Total tax saving over 5 years | $17,777 | n/a |
Tax implications with a novated lease vs car loan
The way a novated lease is treated for tax purposes is how it differs most from a car loan. It’s also the reason novated leases work out cheaper than a car loan in a lot of cases.
- With a novated lease you don’t pay GST on the vehicle purchase price (a saving of up to $6,334).
- At least part of the finance payments and car running costs come from your pre-tax salary so you save on income tax.
- You also save on GST on your packaged car running costs with a fully-maintained novated lease.
- Novated leases are subject to fringe benefits tax (unless the vehicle is eligible for an electric vehicle exemption).
- With a car loan, the repayments and car running costs are made using after-tax money with no GST discount.
How do the repayments work on a novated lease vs car loan?
Car loans generally offer more flexibility regarding repayments compared to novated leases. Here are the key differences:
Novated lease
- Repayments are automatically deducted from your salary, which reduces your take-home pay.
- Paying out the lease early requires covering the residual amount, and break fees may apply.
- If your income stops temporarily (e.g. during maternity leave), you’ll need to cover the lease payments yourself.
Car loan
- The lender sets up the repayment schedule as part of the loan agreement, typically via direct debit from your nominated bank account.
- Repayments can usually be made weekly, fortnightly or monthly, depending on the lender.
- You can usually make additional payments or pay off the loan early to reduce interest costs, though some lenders may charge exit fees.
What about car running costs?
This is where a novated lease can have the edge over a car loan for a lot of borrowers.
Novated lease
- You can bundle most car running costs into your novated lease deal so you only have a single regular payment.
- Paying for these costs with your pre-tax salary can save you on GST and reduce your taxable income.
- Some lease providers may limit where you can cover certain running costs (e.g. a fuel card might only be accepted at specific petrol station chains).
Car loan
- You’ll need to budget for running costs separately, and unexpected expenses like a blown tyre or major service can strain your finances.
- There are no tax or GST savings associated with running costs when you have a car loan.
- You have complete freedom to choose your fuel provider and manage all other car expenses independently.
Which is better: Novated lease or car loan?
Choosing between a car loan and a novated lease was a real dilemma for Money.com.au’s Editor, Sean Callery, just a few years ago.
Our old car was on its last legs – and reversing it into a neighbour’s vehicle certainly didn’t help. With plans to start a family, my wife and I needed something bigger (with a reversing camera!). She was eligible for a novated lease through her employer, while our other option was a traditional car loan, which we’d used for our previous car.
When it came down to it for us, the novated lease vs car loan calculation and the savings involved meant it made sense to go with a novated lease. And there we are awkwardly posing beside our new car.
Obviously this outcome was specific to our situation.
Given how these products work, everyone’s costs will be different. If you want to do the sums for yourself, consider getting personalised quotes for a novated lease and car loan.
A few years on, I’m still happy with our decision. But there’s been good and bad.
To wrap up...
The good
The lease company did a lot of the work for us to get everything set up.
It’s nice not needing to budget for ongoing car expenses, particularly the big once-a-year costs like registration & CTP, plus car insurance.
We’re saving money overall.
The bad
There’s occasional admin – for example, we pay for and then claim back our annual car insurance premium.
When my wife was on maternity leave and not earning a salary, we needed to change how we made the payments.
The residual payment on the novated lease is coming down the track (we’ve been saving and have some money put aside for it!).
Novated lease
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