Article Highlights
Yes, you do pay interest on a novated lease, but it's bundled into your fixed lease payment and deducted from your pre-tax salary, reducing your taxable income.
Novated lease interest rates typically sit between 8–12% p.a., which may look higher than a car loan, but tax savings and GST benefits often make the total after-tax cost lower.
Electric vehicles under the FBT exemption can deliver significant extra savings, with interest costs offset in tax advantages.
If you're weighing up whether a novated lease makes financial sense, one of the first questions you'll probably ask is: do you pay interest on a novated lease? The short answer is yes. But the way that interest works, how it's charged, and what it means for your wallet is quite different from a traditional car loan.
Let's break it down in plain language, so you can see exactly where your money goes and why a novated lease might still save you thousands, even with interest baked in.
Car Loans vs Leases: Where the Interest Shows Up
With a standard car loan, the interest is pretty transparent. You borrow a set amount, the bank charges you interest on that balance, and you repay both the principal and the interest over time. Your loan statement will show exactly how much interest you're paying each month.
In a novated lease, things look a bit different. Your lease payment is a single fixed amount, and the interest component isn't itemised on your payslip. Instead, your payroll department simply deducts that fixed amount from your pre-tax salary each pay cycle.
If you want to see the interest breakdown, you can ask your lease provider for a finance schedule. Under the National Consumer Credit Protection Act, they're required to disclose the cost of funds, even though a lease is technically not classified as a loan. That schedule will show you exactly how much of your payment goes toward interest and how much covers the vehicle's depreciation.
One important difference: with a novated lease, the interest is calculated on the GST-exclusive purchase price. That's because the financier claims the GST input credit upfront, which is another way you save.
So, Do You Actually Pay Interest on a Novated Lease?
Yes, you do. But here's the key: even though the effective interest rate on a novated lease might sit somewhere between 8% and 12% p.a., the total after-tax cost can still work out cheaper than a car loan with a lower advertised rate.
Why? Because your lease payments come out of your pre-tax salary. That lowers your taxable income, which means you pay less income tax overall. On top of that, you're also saving on GST for the car purchase and running costs like fuel, insurance, rego and servicing.
So while the interest rate might look higher on paper, the tax benefits and GST savings can more than make up for it. In 2026, the effective interest rate on a five-year novated lease sits around 9.5% p.a., yet after tax the "real" cost can feel closer to 5% for someone in the 37% tax bracket.
What About Electric Vehicles and FBT in 2026?
If you're considering an electric vehicle, the savings get even better.
Since 1 July 2022, zero and low-emission cars under the luxury car tax threshold ($91,387 for 2025-26, indexed annually) have been exempt from fringe benefits tax. That exemption has triggered a surge in EV novated leases.
Interest rates on EV novated leases also tend to be slightly lower, usually by around 0.3–0.5%, thanks to strong resale demand. And when you combine that with the FBT exemption, the total tax advantage could slice up to $10,600 a year off the cost of a Tesla Model Y, for example.
It's worth noting that plug-in hybrids lost the FBT exemption from 1 April 2025, unless the vehicle was already under lease before that date. If you're looking at a hybrid, check the grandfathering rules with the Australian Tax Office. Also, the FBT exemption beginning to wind back from 1 April 2027.
Typical Novated Lease Interest Rates in 2026
Right now, the average secured new-car loan rate in Australia is sitting around 7.3% p.a., according to RBA data. Comparison sites like Finder show a range from 5.09% to 20%, depending on your credit history and the lender.
Novated lease rates are typically a bit higher, between 8% and 12% p.a. That's partly because of the fixed term, the ATO-mandated residual (or balloon payment) at the end, and the administrative costs involved in managing the lease through your employer.
But remember, it's not just about the rate. It's about the total cost after tax. When you factor in the pre-tax deductions, GST savings, and (for EVs) the FBT exemption, the effective cost drops significantly.
Ways to Keep Your Rate Competitive
While you can't completely avoid interest on a novated lease, there are a few things you can do to keep your rate as low as possible.
Improve your credit score. Finance providers assess your credit history when setting the rate. A good credit score will help you secure a more competitive rate.
Choose the right lease term and residual. The ATO sets minimum residual values based on the lease term. For example, a five-year lease requires a residual of 28.13%. Your choice of term and residual affects how the interest is calculated, so it's worth talking through the options with your provider. You can read more about this in our balloon payments guide.
Work with a provider that has fleet-buying power. Employers increasingly use panel lease providers to access fleet-discounted rates. Easi participates in multiple panels and uses our 30-year fleet-buying power to negotiate below-market finance margins, which we pass on to you.
Consider an electric vehicle. As mentioned earlier, EVs often attract slightly lower interest rates and come with the added bonus of the FBT exemption, which can save you thousands each year.
Why Total After-Tax Cost Matters More Than the Rate
Here's the thing: focusing only on the interest rate can be misleading.
A car loan might advertise a rate of 6.5% p.a., which sounds great. But if you're paying for that car with after-tax dollars, you're not getting any tax relief. You're also paying GST on the purchase price and all your running costs.
With a novated lease, your payments come from your pre-tax salary. That reduces your taxable income, which means you pay less tax. You also save on GST for the car and ongoing expenses. When you add it all up, the total cost can be significantly lower, even if the nominal interest rate looks higher.
If you're not sure how the numbers stack up for your situation, you can use our novated lease calculator to see your potential savings. It takes into account your salary, the car you're interested in, and the tax benefits you'd receive.
Save on Tax with Your Next Car Through a Novated Lease with Easi
So, do you pay interest on a novated lease? Absolutely. But that interest is just one piece of the puzzle.
When you look at the full picture, including the tax savings, GST benefits, and (for electric vehicles) the FBT exemption, a novated lease can be one of the most cost-effective ways to finance a car in Australia.
At Easi, we've been helping Australians save on vehicle costs since 1992. Our expert team can walk you through how a novated lease works, answer any questions you have about interest rates, and help you find the best deal for your financial situation.
Ready to see how much you could save? Get in touch with our team today, or use our online calculator to get started.
