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Novated Lease vs Car Loan

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If you are looking to upgrade to a new set of wheels without spending a chunk of savings, there are a number of options available for motorists including novated leases and car loans.

What is a novated lease?

A novated lease is an agreement typically struck between you, your employer and a lender. This agreement aims to help you get behind the wheel of a new car with the potential for significant savings for both you and your employer. 

In essence, a novated lease is a lease agreement with a finance provider or a bank. This lease agreement requires you to ‘salary sacrifice’ portions of your pre-tax income to cover vehicle repayments. From there, your employer takes these portions and makes repayments to your finance provider or bank on your behalf.

The novated lease is not tied specifically to a job, meaning if you were to change jobs you are able to take the car with you and continue to make repayments directly or transfer your agreement to a new employer.

What is a car loan?

A car loan is a loan taken out for the purpose of buying a car. If you haven't got enough in savings to buy a car, but you can afford to repay a loan in monthly instalments, you may want to consider taking out a car loan to finance your new set of wheels.

In return for the loan to obtain your new wheels, you will be required to pay interest to the financial institution that lent you the money.

Like any loan, when it comes to the structure of a car loan you are required to pay back the loan within a certain time frame (called the term) which can range from three to five years. This is the amount of time over which you agree to pay back the loan, usually in monthly instalments.

Check out our car loan calculator to work out approximately how much your car will cost you over the term of your loan. 

Car Loan calculator

Pros and cons of novated leases and car loans

Pros of novated lease

  • Repayments are cheaper: Compared to a monthly car loan repayment, a monthly lease payment is often cheaper. This lower cash demand can free up money for other needs.
  • Drive the latest models: With leasing, it’s easy to switch to a new car every few years, allowing you to have some of the latest car safety and technology features.
  • Maintenance: Many car leases come with a maintenance package, with maintenance costs included in the regular lease payments. This can include servicing and repairs.
  • Tax benefits: Leasing a car for commercial purposes or under a novated lease arrangement can generate significant tax savings for some. For more info about this, talk to a registered tax agent.

Cons of novated lease

  • You do not solely own the car: Until you pay the balloon payment (residual), the title of the car is in the name of the finance company. This means that you cannot sell the vehicle.
  • Modification restrictions: Got the itch to go off-road and require some extra equipment for your vehicle to get you there? It's likely you'll need permission from the lease company if you wish to modify a leased car’s design or performance. 
  • Driving restrictions: Many leases have restrictions on how many kilometres the car can travel over the set period and how much wear and tear it endures. Breaching these will attract extra costs.
  • High long-term cost: Car leases are often more expensive over the long-term (such as five two-year leases over ten years) than simply buying a car with a car loan and sticking with that same car for a decade.

Pros of car loans

  • You own the vehicle: Buying a car with a car loan places the vehicle’s title in your name. Although this may be the case, you do not hold 'clear title' until the debt is paid off because the lender holds an 'interest' in the car while the debt is outstanding. 
  • Tailored to your needs: As the owner of the vehicle, you’re free to drive it as much as you like, wherever you like or modify it however you want.
  • You can sell the car: Even if you still have a debt owning on the car, you're generally free to sell it, although it’s important to talk to your lender before doing this.  
  • Power to compare: There are many providers of car loans in Australia offering secured or unsecured car loans at fixed or variable interest rates. Car loan customers have the power to shop around to find a good value product with the right features for them.

Cons of car loans

  • Higher recurring payments: Given the fact that you are paying off the total cost of the car (instead of merely paying for its use), car loan repayments are usually higher than lease payments.
  • Repair bills: As the car gets older, servicing and repairs become a greater expense.
  • Selling hassle: If you want to get a new car, you’ll have to deal with the hassle of selling the car or trading it in.
  • Depreciation: Cars usually significantly depreciate in value, particularly in the first couple of years. As the car’s owner, you’ll have more money tied up in this depreciating asset.

If you are looking to purchase a new set of wheels, check out our range of car loan options that may be of benefit to you or chat to one of our lending specialists.

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About the article

As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.

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