Novated leasing has become a popular option for individuals seeking a cost-effective and convenient way to finance a vehicle. This arrangement involves an agreement between an employee, their employer, and a finance company.
While novated leases offer flexibility and tax advantages, and can even be transferred between employers, terminating such a contract prematurely can have significant financial implications. In this article, we will explore the consequences of ending a novated lease early.
Financial Ramifications
One of the primary considerations when terminating a novated lease ahead of schedule is the financial impact. Novated leases typically involve fixed monthly payments, covering not just the cost of the vehicle but also associated expenses such as insurance, maintenance, and fuel. If the lease is terminated early, the lessee may be required to pay out the remaining balance of the lease term.
This payout can be a substantial amount, as it includes the outstanding principal on the vehicle, as well as any remaining interest and fees. It’s crucial for individuals contemplating early termination to carefully review the terms of their novated lease agreement to understand the specific financial obligations they will face.
Penalties and Fees
In addition to the outstanding balance, terminating a novated lease early often attracts penalties and fees. Finance companies impose these charges to compensate for the anticipated loss of interest income and to cover administrative costs associated with closing the lease ahead of schedule.
These penalties can vary widely and may be outlined in the lease agreement. It is advisable for individuals considering early termination to consult with the finance company and fully comprehend the extent of penalties and fees they may be required to pay.
Impact on Tax Benefits
Novated leases offer tax advantages, with payments made from pre-tax income, potentially reducing an individual’s taxable income. However, if the lease is terminated prematurely, the tax benefits may be affected.
It is crucial to seek advice from a tax professional to understand the specific implications on tax benefits associated with terminating a novated lease early. Being aware of potential tax consequences can help individuals make informed decisions and avoid unexpected financial setbacks.
Options for Early Termination
While early termination of a novated lease can be financially challenging, some individuals may find it necessary due to changed circumstances. In such cases, exploring alternative options, such as selling the vehicle privately or negotiating with the finance company for a more manageable payout, could be considered.
Terminating a novated lease early is a decision that should not be taken lightly, given the potential financial consequences involved. Individuals considering early termination should carefully review their lease agreement, seek advice from financial and tax professionals, and explore all available options to minimise the impact on their finances. Making informed decisions and understanding the potential ramifications can help individuals navigate the complexities of ending a novated lease prematurely.
The Fincar team is here to help you with all your financing needs. Contact us today to help arrange your next car or equipment loan.