Novated Lease or Car Loan: Which is Best?
Deciding whether to take out a novated lease or a car loan can be a tough decision.
You might have had a novated leasing company come into your work and give a spiel about how you can save money by paying some of your finance pre-tax and some post tax. Unfortunately, this product is usually oversold, and many people are not aware of the finer details and the true costs that really matter.
We usually find that a car loan is a better solution for most people, but it is situation dependent.
What’s the difference?
A novated lease is where you have a three-way agreement between yourself, your employer, and a lender.
- Your employer pays the lease payments directly to the lender from your pre-tax income.
- Includes all running costs.
- The interest rate and insurance charges are almost always not disclosed when you apply or get the car, so you could be committing to a high rate without even knowing.
With a car loan, you have the agreement with the lender and are responsible for meeting payments yourself.
- You are aware of all interest rates and fees before signing.
- A quick process to get into your new car.
- You are responsible for setting up and paying the required amount each month.
Keys things to know about a novated lease
At Auto Car Loans we offer novated leases, but we usually don’t recommend them! Here’s why:
- Since it is a commercial agreement, you waive your consumer rights when you sign up. That means you aren’t covered under the National Consumer Credit Protection Act which requires disclosure of interest rates and a number of other safeguards for consumers.
- The addition of fees and bundling of finance and running costs can mean you are paying MUCH more than with a normal car loan.
- All novated leases have a mandatory balloon residual payment, so after the term of the novated lease, you’re not going to be the owner of the car. You’ll have the option to buy it for the residual amount, but you won’t have built any equity in the car at all.
- Break costs are associated because they are commercial contracts.
Novated Leasing companies will often talk up the tax savings of a lease. These companies hide huge finance commissions behind the complexity of a lease (i.e. bundling of running costs, purchase costs, finance and insurance costs, all calculated against your income tax bracket), so it can be hard for you to realise what the true cost of the lease actually is.
Behind every novated lease lies a car loan and an interest rate, and usually a whole lot of insurances that you may or may not need. The interest rates on novated lease finance are often MUCH, MUCH higher than a standard car loan, earning the leasing companies huge commissions while the buyer thinks they’re getting big savings.
What happens if I leave my place of employment?
If you end up leaving your place of employment, then your novated lease will become a regular loan agreement between you and the lender. There will be a break cost, a higher interest rate, and the tax benefits are no longer applicable. If you have a regular car loan, things continue on as normal, as long as you continue to meet your payments.
Can I really save money with a novated lease?
It’s not so common that someone will have an overall cost saving by doing a novated lease. While it is presented that you may save XX amount of tax, unless you are going to drop two tax brackets then it’s often not going to compensate for the huge interest rates and insurance costs which are usually hidden in the lease.
Unsure which option is right for you?
Many novated lease customers who use their car for business purposes don’t realise they are eligible for a chattel mortgage and associated tax deductions. At Auto Car Loans, we offer personal car loans, novated leases and chattel mortgages. If you’d like to discuss your options with our team at Auto Car Loans, contact us here or call us on 1300 301 051. We’ll be more than happy to explain in further detail the differences between car loans and novated leases to help you make the right decision to suit your needs.