Novated Lease vs Car Loan vs Chattel Mortgage


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Compare Novated Lease vs Car Loan vs Chattel Mortgage


A novated lease, secured car loan, and chattel mortgage are all forms of vehicle finance available in Australia. All three are used to finance a vehicle, though before you compare terms and rates, you’ll want to consider how you plan to use the vehicle and any benefits you may wish to receive:


  • Novated Lease - Provides GST and personal tax benefits. The vehicle can be used for personal and business purposes. 
  • Car Loan - No restrictions on vehicle choice. The vehicle can be used for personal and business purposes. 
  • Chattel Mortgage - Provides GST benefits and business tax benefits. The vehicle must be used for business purposes at least 51% of the time.

ComparisonNovated LeaseCar LoanChattel Mortgage
Amount$5,000 - $150,000$5,000 - $100,000Up to 100% of asset cost
Terms6 months - 5 years2 - 7 years2 - 5 years
FeesLowMediumLow
InterestFrom 5.00%From 5.00%From 4.79%
Best Used ForSalary Packaging a vehicleFinancing a personal vehicle without salary packagingFinancing a business vehicle or business machinery

Novated Lease vs Car Loan vs Chattel Mortgage Overview


Novated Lease


A novated lease is only used by employees who are paid a salary, or business owners who pay themselves a salary from their own company:

  • A novated lease includes the cost to finance a vehicle and the associated running costs, which are estimated by the novated lease finance company 
  • Provides immediate GST benefits and ongoing tax benefits 
  • Vehicles must be a passenger vehicle with a maximum payload of 1,000 kg 
  • There are no limitations on how the vehicle is used

Car Loan


A car loan is not dictated by the borrower’s employment situation:

  • They are a fixed-term, fixed-rate vehicle loan secured by the purchased vehicle 
  • They do not provide the same unique GST benefits as a novated lease or chattel mortgage 
  • Allows vehicle finance with no restrictions on use and the fewest limitations on vehicle choice
Money Tip

You can use our free Car Loan Calculator to estimate your repayments on various car loans.

Chattel Mortgage


A chattel mortgage is a type of vehicle finance used by sole traders and businesses to purchase a vehicle:

  • Offers similar GST benefits as a novated lease but does not provide the same tax benefits 
  • Greater vehicle choice than a novated lease 
  • Can be used to purchase company cars or delivery vehicles and heavy machinery 
  • Vehicle must be used for business purposes at least 51% of the time
Money Tip

You can use our free Chattel Mortgage Calculator to compare lender offers and estimate your repayments on a chattel mortgage.

Novated Lease vs Car Loan


A novated lease and a car loan both provide immediate full ownership of the vehicle, and there are no restrictions on how the vehicle is used for personal or business purposes. The main difference between a novated lease and a car loan is in how the vehicle is financed:


  • A fully maintained novated lease is only available through a novated leasing company, and includes both the vehicle finance cost and its related operating expenditure in the total loan repayments.

    These repayments are then taken directly from the employee’s pre- and post-tax salary by way of automatic payment to the leasing company. 
  • A car loan is available from banks, dealerships, car loan lenders, and vehicle brokers. The car loan can include on-road costs and insurance, however as the loan is secured only by the vehicle itself, this may incur additional fees.

    Operating costs are entirely the borrower’s responsibility, and are not included in the loan amount. Payments are made directly to the financier from the borrower. 

A novated lease also provides borrowers with certain GST and tax benefits which are not available under a standard car loan agreement. These are covered in detail in the following section on comparing a novated lease with a chattel mortgage.


Novated Lease vs Car Loan Pros and Cons


Novated LeaseCar Loans
Pros
  • Vehicle finance largely through pre-tax salary
  • No GST payable on the car
  • No GST payable on running costs
  • Fully maintained personal vehicle - including fuel, insurance, servicing, repairs, roadside assist and registration
  • Flexible payments
  • Options for longer terms than a novated lease
  • Can purchase a car through private sale
  • Loan repayments remain fixed for the term and can’t change similar to de-novation.
Cons
  • An employer must agree to salary package the vehicle for an employee
  • Fully maintained lease only available through a novated leasing company
  • Often there is no GST benefit to buying privately
  • Vehicle must be a passenger vehicle and cannot exceed a maximum payload of 1,000 kg
  • No GST benefits
  • Does not lower taxable income

Novated Lease vs Chattel Mortgage


A novated lease and a chattel mortgage provide similar GST and tax benefits to borrowers under each finance agreement. The main differences between a novated lease and a chattel mortgage are:


  • Who can apply 
  • Who owns the vehicle 
  • How the vehicle can be used 

Using a novated lease:

  • The borrower must be paid a salary - novated lease payments are deducted from the employee’s salary in agreement with the employer 
  • The borrower takes full ownership of the vehicle 
  • The vehicle can be used for personal use, business use, or a combination of the two 

Using a chattel mortgage:

  • The borrower must be a sole trader, or operating a business 
  • The business takes full ownership of the vehicle and is listed as a business asset 
  • The vehicle must be used for business purposes at least 51% of the time, however can be used as a personal vehicle as well

Novated Lease vs Chattel Mortgage Tax and GST benefits


A novated lease uses an employee’s pre-tax and post-tax salary to make finance repayments to a leasing company. The pre-tax payments reduce the employee’s total taxable income, which can even place the employee into a lower tax bracket, resulting in significant tax savings

As the leasing company procures the vehicle, the borrower will not pay GST on the initial purchase price of the vehicle. Any GST included in the lease charges can be claimed by the employer, which are then passed on as savings to the employee leasing the vehicle. 

The leasing company will estimate running costs for the vehicle, which are included in regular lease repayments. Running costs include everything you might pay for in relation to the vehicle’s use throughout the term, such as:


  • Registration 
  • Insurance 
  • Servicing costs 
  • Replacement tyres 
  • Petrol costs 
  • Vehicle repairs 
Money Tip

You pay no GST on running costs for your vehicle under a novated lease. These are estimated by the leasing company and bundled into the total lease amount.


Chattel mortgages are only used to finance business vehicles, which allows a business to immediately take advantage of the tax benefits of ownership. If your business is registered for GST on a cash basis and uses a chattel mortgage to purchase a vehicle:


  • The vehicle becomes an asset on the business’s balance sheet 
  • You can claim the initial purchase-price GST back on your next Business Activity Statement (BAS) following the establishment of the chattel mortgage

Any depreciation on the vehicle can be claimed through your end-of-year tax return. As the vehicle is registered as a business asset, all interest on your chattel mortgage is also tax-deductible.

Novated Lease vs Chattel Mortgage vehicle restrictions


If your employer agrees to a novated leasing arrangement, you can choose the kind of vehicle that suits you and your lifestyle - from SUVs to 4WDs and sports cars. You are not restricted in vehicle choice in the manner of the limitations applied to a typical company car or fleet policy. 

There are two restrictions to choosing a vehicle for a novated lease:


  • You can only finance a passenger vehicle (including utes) 
  • The vehicle’s maximum payload cannot exceed 1,000 kg

The only restriction on vehicles for a chattel mortgage is that the financed vehicle must be used for business purposes, at least 51% of the time. Chattel mortgages can also be used to purchase any type of business vehicle, and are often also used to purchase heavy vehicles or machinery. This can include:

  • Cars and Motorcycles 
  • Work Vans and Delivery Vans 
  • Work Utes 
  • Trucks and Trailers 
  • Buses 
  • Diggers 
  • Forklifts 
  • Mining Machinery 

Unlike a car loan, you can borrow more than 100 per cent of the vehicle’s up-front cost in a chattel mortgage agreement. As a sole trader or business owner, this means you can include associated costs such as insurance and on-road costs, or aesthetic add-ons such as vinyl vehicle wraps for company branding.

Novated Lease vs Chattel Mortgage Pros and Cons

Novated LeaseChattel Mortgage
Pros
  • The vehicle can be used exclusively for personal use, business, or a combination of the two
  • Simple salary packaging of the vehicle
  • Tax benefits
  • Vehicle recognised as a business asset
  • Can reclaim the GST on the vehicle’s initial purchase in the next BAS
  • Competitive rates
  • Can be used for non-passenger vehicles
Cons
  • Vehicle must not exceed a maximum payload of 1,000 kg
  • Cannot be used for machinery or delivery trucks and vehicles
  • Monthly instalments and the residual balance (balloon) are not tax-deductible 
  • Accounting work involved in claiming GST and deductions can involve more work than using a novated lease
  • Vehicle must be used for business purposes at least 51% of the time

Novated Lease vs Car Loan vs Chattel Mortgage Summary


A novated lease, car loan, and chattel mortgage are all used to finance vehicles. Novated leasing and car loans allow full personal use and ownership of the vehicle, while a vehicle obtained through a chattel mortgage is owned by a business, registered as an asset, and must be used for business purposes at least 51% of the time

Both a novated lease and chattel mortgage offer specific GST and tax benefits; employees benefit from a novated lease, while a business or sole trader will benefit from a chattel mortgage

Novated leasing is only used for passenger vehicles with a maximum payload of 1,000 kg, chattel mortgages are used for all types of vehicles and business machinery, and a car loan is used for any personal vehicle provided it is not older than 12 - 15 years old at the end of the loan term.



Novated Lease vs Car Loan vs Chattel Mortgage FAQ


How do I apply for a novated lease or chattel mortgage?


You can only apply for a fully maintained novated lease through a novated leasing company. A novated lease acquired directly from a bank will always be self-maintained, and not offer the same benefits as a fully maintained lease. You can apply for a chattel mortgage with your bank, finance brokers, non-bank lenders and specialist asset finance lenders.


Is a novated lease or chattel mortgage better for business vehicles?


A novated lease is only used by employees, and the lease agreement is tied to the employee. If an employee with a novated lease leaves the business, the employer will have no claim on the vehicle as a business asset. A chattel mortgage registers the vehicle as a business asset, and can be used by any number of employees over the term of the agreement. You can compare a chattel mortgage vs lease vs hire purchase for business vehicles.


Are tax benefits the same for a novated lease and chattel mortgage?


A novated lease uses the pre-tax salary of the borrower to make repayments. This lowers the total taxable income of the borrower, and can even push them into a lower tax bracket. A chattel mortgage allows sole traders and businesses to claim depreciation on the vehicle as a business asset, and interest on repayments are also tax-deductible.


Should I use a novated lease or chattel mortgage if I own a business?


If you own a business, you will need to pay yourself a salary from the business to qualify for a novated lease. You will have personal ownership of the vehicle, while a chattel mortgage will register the vehicle as a business asset. A novated lease is ideal if you plan to acquire the vehicle for personal use; if you plan to use the vehicle predominantly for business purposes, a chattel mortgage may be more suitable.


Can I get a novated lease or chattel mortgage with bad credit?


Most novated leasing companies will require a fair to good credit rating in order to process and approve an application. Chattel mortgage lenders may overlook your credit history provided you can demonstrate your ability to comfortably repay the loan amount. Alternatively, you can use a bad credit car loan to acquire a personal vehicle.