Novated Lease vs Buying Outright: Is a Novated Lease Better?

What’s the most cost-effective method of purchasing a car? This question continues to enrage debate, and rightly so.

A novated lease vs. buying outright: which is better? Contention still exists because large-scale financial decisions such as buying a car should be made with all the facts and only after careful consideration.

Both methods have obvious positives, and as a potential car owner, it’s up to you to figure out which will work better for you. It’ll always be more relevant to your circumstance.

So, at Vehicle Solutions, we have worked to place all the pertinent information regarding whether a novated lease or buying outright a new car will suit you the best. Continue reading to find out if a novated lease is the vehicle financing option you’ve been searching for!

What Is a Novated Lease, and What Are the Benefits?

The most significant advantage of a novated lease and where you’ll save the most money is the post-tax salary benefits. A novated lease is an agreement between three parties, you, the finance company, your employer and a fleet provider.

The idea is that your employer sacrifices a percentage of your salary each week and pays it directly to the fleet provider. This reduces your taxable income, and you won’t finance the car payments GST either, which will save a considerable amount of money compared to buying outright.

Your novated lease includes all your on-road costs, including fuel, servicing, and maintenance. At the end of the five-year novated leasing period, you will have the option to pay a lump sum to legally purchase the vehicle, which you can then keep or sell tax-free if you wish.

Buying a Car Outright with a Consumer Loan

It’s the most common method of procuring a new vehicle, and often, that’s just because people lack an understanding of how novated leasing works and how it can save them money. Taking out a loan and buying outright allows you to pay off the car over the total loan period.

While some drivers find this preferable, your repayments will be higher throughout the loan and the vehicle’s life, and you won’t see any of the benefits of salary sacrifice. You also won’t save on the GST for any necessary purchases for your car.

Additionally, cars do depreciate very quickly, and trading in your vehicle after you’re looking to upgrade can regularly feel underwhelming. Obtaining vehicles through novated leasing will never leave you with the hassle of selling or trading in a car again.

Call the friendly team at Vehicle Solutions today and find out how much you can save with a novated lease!

Pros and cons of novated leasing and buying outright

Novated lease pros

  • Vehicle finance primarily through pre-tax salary
  • No GST is payable on the car
  • No GST payable on running costs
  • Fully maintained personal vehicle – including fuel, insurance, servicing, repairs, roadside assistance and registration

Novated lease cons

  • An employer must agree to the salary package for the vehicle for an employee.
  • Fully maintained lease only available through a novated leasing company
  • The vehicle must be a passenger and cannot exceed a maximum payload of 1,000 kg.

Buying outright pros

  • No finance applications
  • No finance costs
  • There are no restrictions on the type of vehicle
  • No credit score impact
  • Employer not involved in your car purchase

Buying outright cons

  • Does not lower taxable income
  • Massive upfront cost
  • Opportunity cost (what else could you use that money for?)
  • Often there is no GST benefit to buying privately

Frequently Asked Questions(FAQs)

Is a novated lease only available to employees?

Yes, novated leases are only available to individuals employed by companies that offer this benefit. The salary packaging arrangement requires employer involvement.

Is buying outright better if I plan to keep the car long-term?

If you plan to keep the vehicle for many years, buying outright can be more beneficial since there are no ongoing payments or residuals, less tax, and you avoid lease-related fees.

Can I own the car at the end of a novated lease?

Yes, at the end of the lease term, you typically have the option to:

  • Pay the residual value and own the car.
  • Re-leasing the vehicle for another term.
  • Return the car to the leasing company and walk away.

Will things get more complicated once the novated lease ends?

No, it’s very simple. At the end of your novated lease, you have a few options.

  • Pay the residual amount (including GST) at the end of the lease term to own the car outright.
  • Sell the vehicle (either privately or through a dealer), and if the sale price is higher than the residual amount owing, you get to keep the profit tax-free.
  • If you want to keep the same car and continue enjoying the tax savings, we can help you to refinance the residual amount for another term.

Which option offers better tax benefits?

A novated lease often provides significant tax savings as lease payments come from your pre-tax salary, reducing your taxable income. Buying a car outright does not offer income tax benefits unless you can claim depreciation or other deductions through business use.