Categories: Leasing a Car
Novated Lease Vs. Car Loan: Which is Best for You?
Novated leases and car loans are two of the most popular financial products to help you finance your vehicle purchase. But which is better, the car loan or the novated lease? You should note that a car loan and novated lease have similarities and differences.
Novated leases and car loans are two of the most popular financial products to help you finance your vehicle purchase. But which is better, the car loan or the novated lease? You should note that a car loan and novated lease have similarities and differences. These similarities and differences can guide you in deciding the best product for you. Let’s learn more below.
Understanding novated leases
A novated lease consists of an agreement between a lender, employer, and employee. Generally, it provides a salary sacrifice solution that ensures you can pay for a vehicle with your pre-tax earnings. Your taxable income will be reduced to cover the vehicle purchase cost.
One thing to note is that you will not own the vehicle during the lease period. Also, a well-maintained lease includes car running expenses, like maintenance and fuel costs.
Getting a novated lease involves obtaining a car lease from a leasing institution, then paying off the lease for a set period, often two to five years. The regular payment during the agreed period will come from your pre-tax salary.
In addition, you will need to pay a residual amount at the end of this lease period. There are several ways through which you can settle this amount, including the following:
- Get a new lease
- Trade in your old vehicle
- Extend the lease
- Pay cash for the residual amount and buy the car outright
The pros of getting novated leases
In novated leases, the employer will make the vehicle payments from pre-tax salary and offer it to the leaser. These agreements ensure you can accrue several benefits, including:
- You will enjoy tax benefits as your income tax will be evaluated from the reduced salary.
- It encourages flexibility at the lease’s end period. As stated above, for the residual amount, you can extend the lease, end the contract, or buy the vehicle outright.
- Low monthly payments since you will only pay for the actual depreciation and usage.
- You get to enjoy pricing discounts from the leasing institution.
- You can add running costs to the agreement, including insurance, fuel, and servicing.
- No restrictions on the type of car. You can choose whatever make, model, used, or new car you need.
- You can transfer the novated lease from one employer to another if you change jobs.
- Employers can use novated leases as a retention and employee attraction strategy.
The cons of novated leases
A novated lease also has some demerits, including the following:
- You will not have car ownership with novated leases.
- At the end of the lease, there may be a residual liability, which is your responsibility to clear.
- If you lose employment during the lease period, your lease agreement will be terminated.
- No modifications can be made.
- The total lease cost may increase if the agreed novated lease period is extended.
- If the vehicle exceeds tear and wear by the end of the lease period, you will have to pay additional fees.
Understanding car loans
Car loans involve loans from an online lender, credit union, or any other financial institution to facilitate vehicle purchases. These loans include secured and unsecured loans. In secured loans, the vehicle will serve as collateral. On the other hand, in an unsecured loan, there is no collateral.
In most cases, the average auto loan term is about seven years. During this period, you must make regular monthly payments to repay the borrowed sum plus the interest accrued. In secured car loans, the lender will repossess the vehicle if you fail to make the payments.
You typically need to complete a loan application that provides information about your financial situation to receive a car loan. Here is some of the information you may require:
- Social Security Number (SSN)
- Current and past employment information
- Current and past addresses
- Information on any debt you might have
- Total income and income sources
The pros of getting car loans
Like novated leases, there are several benefits that you can accrue from getting a car loan. These merits include the following:
- You will be the car owner as soon as you purchase the vehicle, even when you use it as collateral.
- There are no restrictions on kilometers driven, so you can drive as much as you desire without fear of additional fees for wear and tear.
- You can hand out a trade-in car or pay a deposit to reduce the amount you need to borrow.
- You can sell the car as long as you clear off the loan.
- You can clear off the loan earlier than the agreed period without incurring additional charges.
The cons of getting car loans
Car loans provide one the ways to finance vehicle buying, but they come with some limitations, including:
- You will be responsible for vehicle running costs, such as servicing and fuel.
- You will pay tax and interest from your post-tax income.
- The lending institution can repossess the vehicle in secured loans if you do not adhere to the regular payments agreement.
- You may have limited car choice options, as some lending institutions regulate the make and model of cars you can take out a loan for.
- Your money will be linked to a depreciating asset.
Novated lease vs. car loan
As you can see from above, several similarities exist between a car loan and a novated lease. Both involve financial products for car purchases and have an agreed term for regular payments. However, they are still different. Here are some ways a novated lease and a car loan compare.
- A novated lease involves a contractual agreement between the lender, employer, and employee. On the other hand, in a car loan, only the lender and the borrower have an agreement.
- A vehicle is a depreciating asset meaning you will save more to buy other than getting a lease if you want to retain it for a more extended period.
- In a novated lease, deductions are on the pre-tax income, while deductions for a car loan are on the post-tax income. This means a novated lease is tax saving compared to an auto loan.
- Both car loans and novated leases are best for personal use.
- With a car loan, ownership starts from the first day. However, with a novated lease, car ownership can only occur if you clear the residual amount at the end of the lease agreement period.
- A novated lease agreement can include vehicle running costs, while a car loan does not cover car running costs.
- In novated leases, you risk losing the vehicle if your employment is terminated. On the other hand, with car loans, you can lose the vehicle if you use it as collateral but fail to make payments.
- With car loans, you can keep the vehicle if you lose employment as long as you make monthly payments.
The question of which is best between a car loan and a novated lease depends on your specific situation. As you can see from above, both car loans and novated leases have their merits and demerits. Therefore, when deciding which is ideal for your specific situation, weigh the pros and cons of each.