Novated Leases: The Hidden Costs
Novated leases are an alternative to taking out a loan or paying cash for a vehicle. But it’s important to understand how they work and the hidden costs!
Your employer might be prepared to pay for a novated lease as part of your salary package. The lease payments are made out of your pre-tax salary. It’s a form of ‘salary sacrificing’.
Novated lease providers usually sell ‘tax savings’ as a major benefit. But any tax savings depend on your marginal tax rate. The higher your salary, the more tax you’ll save. If you’re on a lower salary, the tax savings may not be worthwhile.
You’ll also have a reportable fringe benefit at tax time if you take out a novated lease. You won’t be taxed on this amount, but it can affect your eligibility for government benefits.
If you’re thinking of getting a car on a novated lease, you also need to be aware of all the hidden costs. Many of these costs are not disclosed or itemised, but they can make novated leasing more expensive than financing a vehicle directly!
Hidden novated leasing costs can include huge commissions or fees to cover:
Inflated finance charges.
It’s not unusual for the interest rate on novated leases to be more than 10%! Much cheaper car loan rates are available directly from lenders. You won't find your interest rate disclosed on any of your novated lease paperwork, but it makes a big difference to the cost of your loan, so always get the rate declared in writing by your leasing company. It pays to shop around to get the best car finance deal, otherwise you’ll end up paying more in the long run.
This is add-on insurance that’s expensive and can often provide you with little (or no) benefit. For example, loan protection insurance and tyre and rim insurance. Add-on insurances are often unnecessarily bundled into novated leases without you knowing. That’s because many novated leasing companies receive big commissions from insurance companies. This was a major issue raised at the recent Financial Services Royal Commission.
You should always check what insurance coverage is included in a novated lease. Do that BEFORE you sign one. It’s important that you’re getting the coverage you need at the right price. Do your research, and don’t pay for any coverage that you don’t need.
Inflated petrol and running costs.
Read the fine print of a novated lease to find out exactly what you’ll be charged. For example, how many kilometres of driving are included? What are the vehicle servicing costs? These novated lease charges may not reflect the amount of driving you’ll be doing or market rates. You’re more in control of your petrol and running costs if you don’t have a novated lease.
Inflated administration costs charged by the novated leasing company.
At the end of the day, a novated leasing company is a ‘middleman’ that needs to make a profit. In addition to the finance and insurance commissions, they often charge set up fees and monthly account keeping fees. This is a cost that you don’t have if you pay for your car yourself or you get another form of finance. Again, it’s crucial to explore all your options. That’s the best way to make sure you’re getting the best deal.
The bottom line
Car financing is a big financial decision. Get it wrong and it could cost you a lot of money. The hidden costs of a novated lease may outweigh any potential tax benefits. Always read any novated lease documentation carefully before deciding whether to sign it. It’s worthwhile getting advice to decide whether a novated lease is a good option for you.
If you would like to know more about the ins and outs of financing, our team at Auto Car Loans are here to help. Call us now on 1300 301 051 to speak with one of our friendly brokers.
DISCLAIMER : The thoughts and opinions conveyed on this website are those of the authors only and are of a general nature. This does not constitute financial or general advice to you from Auto Loans Group. You should seek your own independent advice from a professional which is specific to your circumstances before considering any of the items referred to in this article, including finance, insurance, and car buying.