Option 1: Buying a car outright

In simple terms, it means you’re purchasing the car in full using your own money. There’s no need for finance, credit checks or third-party lenders – it’s all between you and the dealership. 

PROS: 

• No interest or monthly payments to worry about 
• Full ownership from the moment you get behind the wheel 
• More straightforward to sell or trade-in later 

CONS: 

• Hefty upfront cost 
• Cars are a depreciating asset and your money could be better used elsewhere 
• If your budget is limited, you might have fewer options 

Option 2: Getting a car loan (traditional finance) 

A car loan involves borrowing money from a lender and repaying it – with interest – over a fixed term, typically 1 to 7 years. The car will act as the security for the loan, though some lenders could take other assets into account. 

Similar to a house loan, your interest rate will be dependent on your credit history, the model you’re eyeing and how much you’re borrowing compared to its worth. 

PROS: 

• You’ll have full ownership from the start of your loan term 
• Option to include a balloon payment but it’s not a requirement
• Allows more flexibility to choose the car you want 
  

CONS: 

• The debt will count as a liability 
• Car running costs are not included in your repayment 
• Payment comes out of your post-tax salary (no tax benefits!) 
• May require a larger upfront payment 
• If you fail to make repayments, the lender can repossess the car

Option 3: Choosing a novated lease   

Everyone’s raving about novated leases and calling it a “smart way” to buy your next car. Yes – it’s technically a lease, but you get your next car and it saves you thousands of dollars because you pay it all using your pre-tax income. So you still get that dream car as planned - but you save on a whole lot of tax too. Bonus!

How does a novated lease work?

Ok, picture your total salary. Not just the amount that hits your bank account - that’s your post-tax income. But the whole starting number. Your total salary is the full amount you earn. Then, your employer pays your PAYG tax, and what’s left is the amount you see in your bank account each month. From there, you’re left to pay rent, bills and all the other stuff. And if you own a car, you then have to pay for that too. A novated lease is interesting because it changes the order.

Before your salary gets paid and your superannuation is taken out, your employer first makes your car payments for you and then pays your tax. So your car gets covered by the money that would’ve normally gone to the tax department, thereby lowering your total salary and reducing the amount of tax you need to pay.

A novated lease also lets you include:

• Fuel,
• Servicing,
• Roadside assistance, 
• Insurance, and
• Registration

into that same pre-tax payment, which further reduces your tax bill and leaves you with very few car expenses left to pay. In simple terms: Smaller car payments. Bigger savings. No surprises. That’s where the “savings” reputation of a novated lease comes from - because you get a big tax savings across the term of your lease.

In some cases, people save tens of thousands of dollars (skip to the hard data below). There are a host of savings that make up this amount – pre-tax income, but also avoiding GST on your car and its running costs, access to fleet pricing on a car, and a few others. For more information, check out our article on the benefits of a novated lease.

PROS: 

• Novated leases are taken out of your income before tax 
• No GST on novated leases allowing you to save up to $6,334 in GST.  If the car you’re buying costs under $70,000, then you could get it GST-free! Plus, you won’t pay GST on running costs for your car 
• Option to include all the running costs 

CONS: 

• Your employer is involved in a novated lease agreement
• Novated leases are not available for all car options
• Similar to a standard loan, there’s a risk of losing the car if your job is unexpectedly terminated and you can’t afford the repayments.

There’s more to consider during the lease process

Unlike buying outright, there are probably a few more things to consider with a novated lease. For example, deciding what you want to be included in the package. Bear in mind that a good novated lease provider will not only facilitate the whole process, but also answer any questions and guide you to a solution that works best for you. So if you choose your provider wisely, there’s no reason not to benefit from the considerable savings a novated lease can offer. Now, with all these pros and cons considered, you should hopefully have a clearer view of whether or not a novated lease is a good option for your next car purchase!

The hard data: cash purchase vs car loan vs novated lease

To illustrate how much more cost effective a novated lease is compared to a car loan or purchasing the car outright, let’s put them side by side and see what it looks like:

This example assumes the following:

• Lease/loan term = 5 years
• $60,000 vehicle purchase price (divided over 5 years at $12,000 per year for ownership calculations).
• A novated lease company (like us at Leaselab) can obtain fleet pricing discounts, in this example we were able to achieve a 15% fleet pricing discount bringing the purchase price down to $51,000
• $464 per month running costs (fuel, insurance, rego, servicing & maintenance, tyres, etc.) approximately 10,000 km per year.
• Car loan interest rate 7.99%
• Minimal business use

Who wins? It depends on your priorities.  

Income bracket 

As mentioned, novated lease repayments come out of your salary before tax is applied. That means you could pay less tax overall – especially handy if you’re in a higher tax bracket. 

Job stability 

Unlike a standard car loan or buying outright, you need to be comfortable with your employer being involved in the process of salary packaging your vehicle.

This isn’t an issue for most people, but it’s still worth noting. Since a novated lease is deducted from your pre-tax salary, your employer needs to be set up for novated leasing too – and they'll need to approve the provider you want. 

Need for flexibility 

Choose a novated lease if you like driving the latest model and want to keep things simple with bundled running costs and pre-tax payments.

But if you want flexibility to do what you like with your car – own it outright, sell it or customise it – then buying it outright would be your best bet. 

Long-term ownership goals

Buying outright makes more sense if you plan to keep the car for many years – we’re talking more than five! Of course, you’ll need to make sure you’ve enough cash to buy a car you’ll want to stick with for that long. That’s why a novated lease could still work if you don’t mind paying a residual and want the convenience of bundled costs. 

The bottom line: Choosing the right option

You need to be sure you choose the option that’s right for you, but novated leases can offer incredible savings that keep a lot of money in your pocket every year.

They also give you a predictable and balanced payment each month for not just your car, but also the car’s running costs. The broad options at the end of your lease, coupled with fleet car prices to get the best deal on the car you want, make them the best of both worlds if you don’t need to own your car upfront. You do need your employer on board, but it’s easy to set them up if they don’t currently offer novated leases (or if they use a different novated leasing provider). You can use our nifty ’suggest us to your employer’ feature.

It can be tempting to think that owning a car outright is the best way to go. Plenty of people avoid loans and leases to avoid costly interest rates and not pay more than the ticket price of the car. However, the largest cost of owning a car is depreciation – the loss in value of the car over time. And whilst traditional car finance can be an inefficient alternative, novated leasing solves most of the challenges that traditional loans create.

Put simply, it’s a new lease on leasing.

Your car is an investment

The simple fact is that, unless you buy a collectable vehicle and put it in storage, your car is going to decrease in value over time - and probably significantly so. A car with a typical rate of depreciation could be worth as low as 40% of its original price after five years. In other words, if you purchase a $100,000 vehicle, then five years later it could be worth just $40,000.

That’s a lot of lost value. And most people wouldn’t argue that on paper it doesn’t look like a wise investment financially. Add operating costs to this equation, and it’s a huge sum to pay for a guaranteed negative return. If someone asked you for $100,000 now in exchange for $40,000 in five years, would you do it? Not likely. But what’s the alternative? Is it always a negative investment to get a car? Not if you consider a novated lease.

What’s right for you? Chat with a novated lease expert!

Structuring your “ownership” of a vehicle through a novated lease allows you to turn car ownership into a positive financial outcome. A novated lease does this by allowing you to put money that you would otherwise pay in tax towards your car. That alone is a game-changer.

It’s like negative gearing an investment property – rather than the tax man getting your money, you use it to pay for and run your car. On top of that, with a novated lease you can access fleet pricing to get a big discount on the price of your car. And as if that’s not enough, you can save up to $6,334 in GST when purchasing the vehicle - plus all of the car’s running costs are GST-free too.

Novated leasing can be the best of both worlds – the same benefits as owning a car, but without the huge upfront outlay (which you can put to better use elsewhere), plus a huge tax saving and none of the drawbacks of a traditional car loan. As you’ve no doubt worked out, a novated lease is very different to an old-fashioned car loan, which adds interest costs onto an already negative situation. By contrast, a novated lease allows you to use the negative aspects of car ownership to obtain a positive tax outcome.

Call us at 1300 888 594 for an obligation-free chat, or check the numbers out for yourself using our novated lease calculator. Keep in mind – this is not intended as financial advice. It’s just general information to keep you informed and doesn’t take into account your specific circumstances.