dsl-logo

Home Loans

Personal Loans

Car Loans

Business Loans

Credit Cards

Banking

dsl-logo
dsl-logo

Home Loans

Personal Loans

Car Loans

Business Loans

Credit Cards

Banking

Background

NOVATED LEASE VS CAR LOAN: COST COMPARISON 2024

  • Our analysis shows a 24.6% saving with a novated lease vs a car loan for an electric car, and a 6.1% saving on a non-EV.

How much could you save on your car with a novated lease?

$

Couple shopping for car

Car loan or novated lease?

This was my exact dilemma two and a half years ago. Our old car wasn’t cutting it anymore (it probably didn’t help that I had recently reversed it into a neighbour’s car).

My wife and I were also planning to start a family and needed something bigger (with a reversing camera!). She was eligible for a novated lease through her work. Our other option was a car loan, which is how we’d financed our previous car.

In this guide:

  • I cover the key differences and similarities between a novated lease and a car loan.
  • I explain how a novated lease is treated for tax purposes vs a car loan.
  • I show you the factors I used to compare novated leases to car loans before deciding.
  • I show a cost comparison for a novated lease vs car loan on an EV and non-EV.

Novated lease vs car loan: The basics

Novated leases and car loans both allow you to finance a new or used car that can be used 100% for personal use. You have a fixed finance term with regular repayments covering the vehicle cost plus interest and fees.

But these options work very differently in other ways. Not least due to the fringe benefits tax exemption on electric vehicle novated leases, introduced in 2022. This has considerably boosted the appeal of novated leasing eligible vehicles.

Here's a summary of the main novated lease vs car loan considerations, and below I've broken the differences down in more detail, including a detailed cost comparison.

Novated lease vs car loan

Car icon

Novated lease

  • Available to employees whose employer offers it as a benefit
  • A novated lease company facilitates the finance
  • Payments are deducted from your salary
  • Helps you save on tax
  • Residual (balloon) payment required for you to own the car
  • Car running costs can be included with the finance
  • Additional government incentive for eligible EV and PHEVs

truck

Car loan

  • Available to anyone who qualifies
  • You apply directly with a lender or through a car loan broker
  • Payments made by you independent of your employer
  • No tax savings
  • Option to include a balloon payment but it’s not a requirement
  • Car running costs are completely separate
  • No additional government EV incentives

Novated lease vs car loan: Electric vehicle cost calculation

Tesla Model 3 RWD Car loan Novated lease

Vehicle driveaway price

$64,201

$64,201

Up-front GST saving

$0

$5,736

Weekly cost (incl running costs)

$369.93

$209.23

Novated lease residual

n/a

$18,090

Total cost over 5 years

$96,182

$72,491

Difference

n/a

$23,691 savings (24.6%)

Important: This is a hypothetical example and costs will be different based on other examples. Calculation assumes a driver in NSW, driving 15,000km per year, with an annual salary of $120,000. Running costs include charging, comprehensive car insurance, registration and CTP, servicing, tyres, plus brokerage costs on the novated lease. Car finance assumes an interest rate of 7.24% and weekly repayments. Estimated driveaway price as at June 2023.

Novated lease vs car loan: Non-EV cost calculation

Toyota Corolla ZR HatchCar loan Novated lease

Vehicle driveaway price

$39,523

$39,523

Up-front GST saving

$0

$3,397

Weekly cost (incl running costs)

$282.62

$222.33

Novated lease residual

n/a

$11,178.46

Total cost over 5 years

$73,481

$68,984

Difference

n/a

$4,497 savings (6.1%)

Important: This is a hypothetical example and costs will be different based on other examples. Calculation assumes a driver in NSW, driving 15,000km per year, with an annual salary of $120,000. Running costs include fuel, comprehensive car insurance, registration and CTP, servicing, tyres, plus brokerage costs on the novated lease. Car finance assumes an interest rate of 7.24% and weekly repayments. Estimated driveaway price as at June 2023.

Novated lease vs car loan: Tax implications

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 $6,191).
  • 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 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.

Novated lease vs car loan: Interest rates

Interest rates work in much the same way on novated leases and car loans. With both options your interest rate will be tailored to you based on your application (e.g. your credit score is a big factor).

However, with a novated lease the company facilitating the lease may work with a limited panel of lenders, meaning you may not have access to the lowest rates. With a car loan you can shop around for interest rates with any lender.

Novated lease vs car loan: Fees

There generally isn’t much to choose from between novated lease and car loan fees.

The main difference is likely to be in your ability to shop around a wider range of car loan lenders to potentially find lower fees.

  • Novated leases and car loans can both come with a finance establishment fee.
  • There may be ongoing lease/loan management fees (e.g. monthly).
  • Break fees may apply if you end the novated lease early or repay a car loan before the end of the term.

Novated lease vs car loan: Trading in your old car

With a novated lease, you can’t use the trade-in value of your old car to reduce your finance amount. You’ll need to take the trade-in amount as a cash payment.

With a car loan, you can put the trade-in value of your old car towards the purchase price of the new car so you don’t need to borrow as much. Or you can take the trade-in amount as cash if you’d prefer.

Novated lease Vs car loan: Residual/balloon payment

The residual payment (the big, one-off payment at the end of the lease or loan term) also works differently depending on whether you choose a novated lease or car loan.

  • All novated leases have a residual value. The residual payment is generally not negotiable as the minimums are set by the ATO.

  • At the end of the novated lease term you can either pay the residual to own the car outright or renew the lease for a new term.

  • A car loan balloon payment is optional (some people choose it to keep their ongoing repayments low) and the amount is negotiable.

  • At the end of the car loan term you can pay the residual, or refinance it into a new car loan to pay off gradually.

Novated lease vs car loan: Making the repayments

This is another aspect of the finance where a car loan will usually offer a bit more flexibility compared to a novated lease.

  • Novated lease repayments are deducted from your regular salary payments.
  • If you want to payout the novated lease early, the lender will calculate the required payout amount and likely add break fees.
  • If your salary stops for any reason (e.g. maternity leave) you will still need to make the payments using your own funds.
  • With a car loan you generally have the option to make the repayments weekly, fortnightly or monthly.
  • You also usually have the option to make extra repayments and repay the loan early to save on interest (fees may apply for doing this depending on the lender).

Novated lease vs car loan: Car running costs

This is an area where overall a novated lease had the edge over a car loan for me.

  • You can bundle most car running costs into your novated lease deal so you only have a single regular repayment.
  • You’ll save on GST and income tax by paying for car running costs with your pre-tax salary.
  • Depending on the lease provider you may be restricted to using certain providers for some of your running costs (e.g. you may get a fuel card you can only use at a single petrol station chain).
  • With a car loan you’ll need to budget for car running costs separately (with no tax savings), but it will be entirely up to you which provider you use for all car running.

The outcome: Novated lease or car loan?

And here we are awkwardly posing beside our new 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, here 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.

Two and a half years on, I’m still happy with our decision. But there’s been good and bad.

The 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, e.g. 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 are saving for it!).

I hope this has helped you get an idea of how the car loan vs novated lease question can play out in real life.

All the best with your decision, whatever option you go with.

Car finance options & guides

The type of car finance that best suits you will depend on your specific circumstances. Here are some helpful guides to get started.

Get a quick novated lease quote

See how much you could save on your car and running costs with a novated lease. Get a personalised, no-obligation quote today.

Information about comparison rates: Comparison rates are designed to allow borrowers to understand the true cost of a loan by taking into account fees and charges, the loan amount and the term of the loan. The comparison rate is based on an unsecured fixed rate personal loan of $30,000 over 5 years. WARNING: Comparison rates are true only for the examples provided and may not include all fees and charges. Different terms, fees or loan amounts might result in a different comparison rate.

Sean Callery Editor Money.com.au

Written by

Sean Callery

Sean Callery is the Editor of Money.com.au. He has over 15 years of international experience. He is qualified with a Certificate IV in Finance and Mortgage Broking (FNS40821) and is compliant to provide general advice in Tier 1 General Insurance (RG 146) products.

Shaun McGowan Money.com.au founder

Reviewed by

Shaun McGowan

Shaun McGowan is the founder of Money.com.au. He's determined to help people and businesses pay as little as possible for financial products, through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.

logo

Our Money Promise

Money Pty Ltd (trading as Money) Australian Credit Licence 528698 provides information about credit products and is authorised to do so as the holder of Australian Credit Licence 528698. Money does not compare every Lender all products or issuers available in Australia. We are not a broker or credit provider and when we provide information via this website, we are not providing you with a recommendation or suggestion about a particular credit product.

This material has been prepared by Money Pty Limited (ABN 40 664 954 536) (Money, ‘us’ or ‘we’). Money is a corporate authorised representative (CAR 001307399) of 62 Consulting Pty Limited (ABN 88 664 809 303) (AFSL 548573) (62C). The material is for general information only and is not an offer for the purchase or sale of any financial product or service. The material is not intended to provide you with financial or tax advice and does not take into account your objectives, financial situation or needs. Although we believe that the material is correct, no warranty of accuracy, reliability or completeness is given, except for liability under statute which cannot be excluded. Please note that past performance may not be indicative of future performance and that no guarantee of performance, the return of capital or a particular rate of return is given by 62C, Money, any of their related body corporates or any other person. To the maximum extent possible, 62C, Money, their related body corporates or any other person do not accept any liability for any statement in this material.

The calculator provided on money.com.au is intended for informational and illustrative purposes only. The results generated by this calculator are based on the inputs you provide and the assumptions set by us. These results should not be considered as financial advice or a recommendation to buy or sell any financial product. By using this calculator, you acknowledge and agree to the terms set out in this disclaimer. For more detailed information, please review our full terms and conditions on the website.

Assumptions:

  • The calculations do not account for changes in interest rates or other market conditions that may occur.
  • Results are approximations and may differ from actual payment schedules or amounts.
  • The calculator does not include all fees and charges that you may incur in relation to a financial product.

Limitation

  • This calculator does not guarantee the availability of any financial product or the accuracy of the calculations. Please consult a financial advisor or the relevant product provider to obtain specific advice tailored to your circumstances.
  • money.com.au does not accept any liability for errors or omissions, or for any loss you may suffer as a result of relying on these calculations.
Money Pty Ltd trading as Money

ABN: 42 626 094 773 / ACL: 528698 / AFCA: 83955
Money is a corporate authorised representative (CAR 001307399) of 62 Consulting Pty Limited (ABN 88 664 809 303) (AFSL 548573) (62C)
aboriginal-and-torres-strait

Money acknowledges Aboriginal and Torres Strait Islanders as the traditional custodians of country throughout Australia and their continuing connection to land, waters and community.

© Copyright 2024 Money Pty Ltd.