Novated Lease vs Car Loan: What’s Right for You in Australia?.

If you’re tossing up between a novated lease vs car loan, the short answer is: it depends on your job, tax situation, and how you plan to use the vehicle. But for many employees in Australia, especially those working for large organisations, a novated lease is often the smartest financial move when done with the right leading company.

At Vehicle Solutions Australia, we’ve been helping Australians with smart vehicle ownerships for over a decade. With more than 40 years of combined experience in vehicle finance and fleet management, our team has supported 400+ employers across the country. We offer a simple, transparent novated leasing model, including 100% tax-free electric vehicle options thanks to recent ATO changes.

Let’s walk through the differences between a novated lease vs car loan, compare real costs, and help you choose the better path for your wallet.

Novated Lease vs Car Loan: What’s the Core Difference?

A car loan is straightforward. You borrow money from a bank or finance company, buy the car outright, and repay over time, typically 3 to 7 years. You’re the legal owner and responsible for everything: insurance, rego, car running costs, and balloon payments if any.

A novated lease, on the other hand, is a three-way agreement between you, your employer, and a leasing company like Vehicle Solutions. The car is leased in your name, but payments (including running costs) are made from your pre-tax salary, which can reduce your taxable income and your overall income tax.

Tax Benefits of Novated Leasing

Under a novated lease arrangement, many of your car running costs, like fuel, servicing, insurance, and registration, are bundled into one regular lease payment. These are deducted from your salary before tax, which reduces your taxable income. The result is you pay less income tax every year.

This is known as salary packaging, and it’s approved by the Australian Taxation Office. You may also avoid paying GST on the vehicle purchase price, saving up to 10%.

Even better, thanks to the government’s recent EV initiative, eligible electric cars under the luxury car tax threshold now attract zero fringe benefits tax under certain conditions, making a fully maintained novated lease on an electric vehicle an especially cost-effective choice.

FBT exemptions now apply to hydrogen fuel cell, plug-in hybrid and electric cars under $91,387 (as of 2024–25) if provided through a salary packaging arrangement.

Car Loan vs Novated Lease Comparison: Real-World Example

Let’s say you’re an employee earning $95,000 per year. You want a new Mitsubishi Outlander Aspire valued at $45,000.

With a novated lease, you reduce your paying tax on up to $15,000–$20,000 worth of running costs and finance payments per year, depending on the package. This can translate to $3,000–$5,000+ in annual tax savings.

Residual Value and Balloon Payment: What to Expect

When your lease term ends (typically 3–5 years), you have three options:

1. Pay the residual value (a set amount based on ATO percentages)
2. Refinance the residual payment
3. Trade in the car and start a new lease

With a traditional car loan, you may face a balloon payment, too, but there’s no tax benefit, and the final amount often feels heavier due to compounding interest rates.

Interest Rates and Loan Terms

Many people assume a car loan is cheaper because you own the car. But it’s not always the case. Once you factor in the interest rate, lease provider management, tax savings, and car running costs, the novated lease can win by a long shot, especially if you:

• Drive regularly.
• Work full-time for a company that offers salary packaging.
• Want a simple one payment option for all running costs.
• Are considering a fuel efficient vehicle or electric car.

Electric Vehicles: A Tax-Free Benefit with Novated Leasing

Thanks to the ATO’s Electric Car Discount, you can lease an EV like the BYD Seal, Atto 3 or Tesla Model Y under a novated lease and pay zero fringe benefits tax, if the purchase price falls below the luxury car tax threshold.

That’s a game-changer!

Combined with state EV rebates and savings on petrol, you could save over $9,000+ a year compared to financing the same EV with a car loan.

When a Car Loan Might Be Better

Despite the benefits, a car loan may suit you better if:

• You change employers regularly.
• You are employed on a casual basis, and hours are not consistent.
• You are a contractor or Uber driver.

Just know that in most other scenarios, especially for PAYG employees, novated leasing makes better financial sense.

Lesser-Known Fact: Leasing Can Improve Cash Flow

Unlike a car loan where you’re locking in high repayments with extra admin (insurance, rego, maintenance), a novated lease gives predictable fortnightly costs. That means better monthly budgeting and fewer surprise bills.

Also, if you change jobs, the lease can move with you or be paid out, depending on your new employers. This offers more flexibility than you might think.

Frequently Asked Questions

Is it better to get a car loan or novated lease?

A novated lease is better for quite a lot of reasons and people. If you’re a full-time employee with access to salary packaging, a novated lease usually offers better tax benefits, lower running costs, and less admin. However, if you’re self-employed, a car loan may be more appropriate. Just be ready to pay a lump sum. 

Is it better to get a car loan or salary sacrifice?

For eligible employees, salary sacrifice through a novated lease offers more advantages, mainly via pre-tax salary deductions, lower taxable income, and bundled car running costs. It’s a way to make your salary work harder for your car.

Do you really save money with a novated lease?

Yes, especially if you choose wisely. Between tax savings, GST exemptions, and reduced income tax, many drivers save thousands over their lease term. It’s most effective for those who drive often and bundle their finance payments and maintenance.

How does a novated lease affect fringe benefits tax?

Most novated leases attract fringe benefits tax, which is often offset by employee contributions (post-tax payments). But for electric vehicles under the threshold, FBT is waived, making it even more cost-effective.

Compare Your Lease Options Now!

At Vehicle Solutions Australia, we make novated leasing simple. Whether you’re looking at petrol models or want to explore electric cars with zero fringe benefits tax, we’re ready to help.

Try our free novated lease calculator today and see what you could save. Or contact one of our consultants to walk through your best option.