Novated Car Leasing vs. Buying a Car Outright or With a Loan

It’s a debate that’s been going on for years – what’s the most cost-effective way to own a car? Purchasing a car through any means is usually a pretty big deal, emotionally and financially. We get dependent on them and can end up spending a fortune on something that’s reliable, looks good and has all the flashy features we need. Both owning a vehicle through a novated lease structure and buying a car with a consumer loan come with their own set of benefits and drawbacks – so how do you decide what’s right for you?

Before deciding, it’s important to weigh up both sides of the argument. Take a close look at your current lifestyle to determine which option fits best. Career choice, car essentials, needs and preferences will all impact the end result too and contribute in reaching a sound decision. Here are the pros and cons of both explained:

What does novated car leasing mean?

Novated leasing is a type of car lease where you own the vehicle under a contract that has a balloon payment (also known as ‘residual value’ – which is a lump sum repayment) at the end of your lease term. In comparison to purchasing a car via a consumer finance loan which involves two parties – the seller and the buyer, novated leasing is a contract between three parties - you, your employer and the bank or financing company. Not everyone understands how a novated lease works, but what you do need to understand is that with novated leasing you have the potential to save serious money.

What are the benefits of novated leasing?

The biggest advantage of novated leasing is the post-tax salary benefits. This is where the big bucks are saved. A novated lease is done via salary packaging which means your employer makes the car payments for you. These payments come out of your pre-tax earnings before your regular pay hits your account.

Cars that are purchased through novated leasing are covered by warranty with the latest models available. You’ll have the opportunity to upgrade the vehicle at the end of the lease, which is typically anything from 1 year to 5 years. Other key benefits include lower monthly payments, fewer upfront costs, reduced repair costs and you’ll pay less tax.

Aside from the easy-to-manage payments you have the significant savings and novated leasing also enables drivers to upscale. Whether your job requires driving a luxury vehicle or you’re in a need of a serious upgrade, leasing a car means you can drive a better car for less money. Some careers need safer cars to drive in country areas or longer distances. Novated leasing gives you access to these opportunities without the big price tag.

“When you purchase a vehicle on a novated lease you don’t finance the GST (up to a maximum of 10%). That’s a significant saving”

What are the drawbacks of novated leasing?

At the end of the day – you own the car with the caveat that there’s a balloon payment at the end, and for some people, this is a drawback.

The rationale behind the residual / balloon payment is that you are paying off the capital cost of the car using pre-tax salary. The ATO has set the residual percentage, so as to bring the residual value in line with the expected market value of the car at the end of the lease. This is because any profit you make when selling the car is not taxed. If there was no residual value, then you would receive a pre-tax benefit of the sale value of the car, which could run into tens of thousands.

Because the car is essentially yours, it will show as both an asset and liability on your personal assets and liabilities.

Buying a car with a consumer loan

Buying a car through a consumer loan like via the bank or a car financing company has always been the go-to method when you’re in need of a car. It’s always made sense to purchase a car when you know you’re going to need one. Not everyone wants to rely on public transport and if your job involves driving around or working far from home, the convenience of having your own vehicle is undeniable. But since novated leasing has become an option booming in popularity, the debate stands about which option is best.

What are the benefits of buying a car outright or with a consumer loan?

Owning a car outright comes with the advantages of paying the car off in full over the period of the loan.

Buying your own car enables you to build up some resale value, paying off the loan earlier and being payment-free and the inevitable independence that many car owners thrive on. Buying a car through a consumer loan is generally paid in full over a 5-year term. At the end of the 5 years, the cost of maintaining the car leads to a further question as to whether it is cheaper to keep repairing an older vehicle or go back to trading the car in on a new vehicle.

What are the drawbacks of buying a car?

Whilst the freedom is certainly a nice feeling that comes with owning your car, there are drawbacks to be aware of.

On average, your monthly repayments will be higher as opposed to novated leasing. This is because, on a novated lease, you are not paying off the residual value / balloon. You won’t reap the pre-tax salary benefits and you won't save the GST on the purchase price or any of your repairs.  There’s no denying that cars can be money pits, and this is where buying over leasing becomes costly. When you do decide to upgrade or move on from your current car, you’ll have to face the hassle of trading it in or selling it too.