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?
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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 explain the key differences and similarities between a novated lease and 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
- 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
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 | $18,090.71 |
Total cost over 5 years | $96,182 | $72,491 |
Difference | n/a | -$23,691 (-24.6%) |
Novated lease vs car loan: Non-EV cost calculation
| Toyota Corolla ZR Hatch | Car 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 (-6.1%) |
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 either a car loan or novated lease, it will be up to you whether you trade in your old vehicle.
The difference is in what you can do with the trade in amount.
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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.
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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.
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All novated leases have a residual value. The residual payment is generally not negotiable as the minimums are set by the ATO.
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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.
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A car loan balloon payment is optional (some people choose it to keep their ongoing repayments low) and the amount is negotiable.
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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?
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 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.
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GET STARTEDGET STARTEDWritten by
Editor
Sean Callery
Reviewed by
Loans Expert
Shaun McGowan
*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.
