A novated leasing arangement is a form of leasing that’s part of your salary package and is negotiated with your employer. However, how is this different from the way that a lot of us bought our first cars? And I don’t mean applying to the Bank of Mum and Dad for an interest-free loan. I’m talking about car loan agreements. Leasing and a car loan arrangement might look similar at first blush, as you end up with a new (or new to you) car and you have to hand over some cash at regular intervals (or have it taken out of your official taxable salary in the case of a novated lease) but they’re not the same thing. So let’s take a closer look.
Novated leasing
Under a novated lease, as we’ve explained quite a few times in our other posts, is where your employer pays the lease, and the amount is taken out of your salary before tax is calculated, so you get a perk without getting bumped into a new tax bracket. You get the car you want and you don’t have to keep logbooks or anything like that, and at the end of the lease term, you have the option to either buy out the residual amount on the lease, or start over with a new lease (and possibly a new car as well). Fringe benefit taxes may or may not be involved, depending on what sort of car you own. Right now (i.e., by the time you’re reading this), only EVs will be exempt from fringe benefit taxes under new novated leasing agreements.
In some cases, your employer will also cover the cost of maintenance and car insurance as part of the novated leasing deal. You can’t modify the car (as you’re not technically the owner) but if you’re not into that sort of thing, then this can mean hassle-free motoring for you.
Loans
With a loan, however, it’s a different story. You have to repay the loan out of your after-tax pay packet, and you probably have to hand over a down payment or deposit at the start of the agreement. Interest on car loans isn’t tax deductible, and that loan will certainly be clicking up interest as the time goes by. In fact, you can end up paying a lot more than the car is worth over the term of the loan, especially given that a car depreciates in value as it gets older. OK, if you want to get really technical, you could argue that a very old car that qualifies as a classic increases in value as it gets older, but that’s the sort of thing that only appeals to classic car enthusiasts.
One of the many benefits of a novated leasing arrangement is that you end up not having to pay as much for the car in the long run – and our handy little calculator will give you an idea of how much you can save.
The benefit is that you own the car – sort of. If you don’t make those repayments, the loan company can repossess the car, which is something that never happens with a properly organized novated lease. This means that you can use it for, say off-road motoring or you can modify it, if that’s what you’re into. However, you have the option of selling the vehicle if you need to (although you’ll still have to pay what’s left on the loan).
Should I choose a loan or a novated leasing arrangement?
This could be a whole topic in itself, as this can come down to your specific situation. There are a number of points to consider. For some people, a novated lease will be the perfect setup; for others, a novated lease may be more hassle than it’s worth and a loan would be better. The good news for you is that FinCar can help you with either situation, as we handle novated leases as well as loans. If you have a wee chat to one of our representatives, we can give you some more advice and steer you in the right direction for your situation.