The 3 options you have at the end of your novated lease
When your novated lease ends, you have the option to: make the residual payment to own the car; refinance the residual into a new lease term with the same car; or trade in the car and start a new lease with a different vehicle.
When your lease term is about to end (after 1-5 years), your provider will send you a payout letter letting you know how much the residual value of the vehicle is. This is the amount required to pay out the lease.
Here’s a detailed breakdown of your options and the possible pros and cons of each.
1. Pay the residual to own the car
At the end of the lease you could choose to make the residual payment to own the car outright.
The residual will be a lump sum payment (aka balloon payment) that's a percentage of the car’s purchase price.
The longer your lease, the lower the residual payment will be.
For example, on a 5-year novated lease, the minimum residual value is 28.13% of the vehicle’s value. If the purchase price of the vehicle was, say, $30,000, that would mean a residual payment of around $9,000 would be required.
You can pay the residual amount using your own savings, or some people finance it using a personal loan.
If you pay out the lease, any leftover funds in your novated lease account will be returned to your employer and paid to you (minus tax).
Pros
- You’ll no longer need to make payments on the car.
- Once you own the car, if you sell it for more than the residual you paid, the profit is tax free.
Cons
- You must make the residual payment using after-tax funds (unlike the regular payments during the novated lease term which are made from your salary before tax is deducted).
- Once the lease ends, you’ll need to cover car running costs with after-tax money and without the GST discount you enjoyed during the lease term.
2. Trade in the car and start a new lease
A common option is to cover the residual payment on the lease by trading the car in and then starting a new novated lease deal with another vehicle.
If you want, your novated lease provider will be able to help you to do this as part of a single process.
That means they’ll facilitate the trade-in of your old car, arrange for the sale funds to be used to pay off the residual value, and if there is a surplus, have those funds paid to you. If the trade-in value of the car is not enough to cover the residual amount, you will need to pay the difference.
The novated lease provider will then help you get set up with a new lease for a new car.
Pros
- With a new lease you’ll continue to get the tax benefits on your vehicle and running costs (e.g. car insurance).
- It can be a straightforward way to upgrade your vehicle.
Cons
- You can’t use the trade in value of your old car to lower your finance amount on the new lease (you must take it as cash).
3. Renew the lease with the same car
At the end of the lease, you may still be happy with the car you have. You may also want to maintain the tax benefits of salary sacrificing your car and running costs (income tax and GST savings). In this case you could choose to refinance the residual payment into a new novated lease term.
That way, the new lease is only covering the residual amount from the initial lease. So the repayments will likely be lower.
The new lease term is usually also shorter than the initial one, e.g. 1-3 years.
There will be a residual payment for the new lease too, but it will be a much lower amount when it falls due.
The option to renew the lease is generally only available if the vehicle will be less than 15 years old at the end of the new lease term (the same rule applies to used car novated leases).
If needed, your car running budget can be changed to reflect changed costs (for example, the capped-price servicing offered by the manufacturer may no longer be available.)
Pros
- Instead of needing to make a large one-off residual payment, it is spread out over a new lease term.
- You continue to enjoy tax benefits on your car running costs.
Cons
- Assuming you are happy with the vehicle (and not owning it outright for the time being) there are no major drawbacks to this option. While the tax savings will be lower compared to a new vehicle, this is simply because your lease costs will be lower.
Which option should I choose?
The best option at the end of a novated lease really comes down to your own circumstances, and importantly whether they have changed since you began your novated lease.
For example, if you need a bigger car, trading in your vehicle and setting up a new lease is a common option. I find that when people get used to the advantages of novated leasing (mainly the tax savings) keeping the arrangement going is very popular.
Whatever your plans, the key thing here is understanding your options from the start, and making sure you're prepared. After all, there is a bit more to think about at the end of a novated lease compared to a car loan.
It's generally good to have a firm idea of what you plan to do when you start the lease. That way you can plan ahead.
The residual value of the car at the end of a novated lease is usually a substantial amount of money to pay at once. It can come as a bit of a shock if you're not prepared for it.
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