You have pictured yourself in a brand-new car for quite some time now and the craving has only got bigger. You woke up one day and it became clear - you deserve it. The smell of the fresh leather and the thought of cranking up your favourite tunes cruising along the beach or through the city excites you.
You might or might not have saved up enough cash to buy a car outright. Either way, do you want to put all your hard-earned money into a new car or is there a better way of financing your dream car?
Of course, you could make a small deposit, take out a car loan and make regular payments for the principal + interest. Or, you could finally learn more about that novated lease your buddy at work has been telling you about for quite some time.
So, what saves you more - a car loan or a novated lease? And what’s better?
Let’s explore both options and then you can decide for yourself.
What is a novated lease?
You might have heard of salary sacrifice or salary packaging before. In salary packaging, you are essentially sacrificing a portion of your pre-tax salary to pay for your mortgage, rent, credit card repayments and more. A novated lease is essentially a salary packaging solution to pay for your car with pre-tax earnings. It’s a three-way agreement between you, your employer and a novated lease provider, such as Easi. The main benefits of a novated lease are a reduction of taxable income and packaging your car expenses into one simple regular payment.
You might also be interested in: Is Novated Lease Worth It in 2020
Pros & cons: novated lease
Pros
✓ Reduces your taxable income, therefore, you’ll be saving money on tax.
✓ Enjoy special discounts related to your running expenses, such as fuel, service, etc.
✓ Package finance payments and running costs into one simple payment.
✓ You don’t pay GST (paid for by lease provider).
✓ No upfront deposit required.
✓ When lease term comes to an end, you have the option to pay off the car or extend the novated lease agreement.
Cons
✗ If you lose your job and your new employer doesn’t want to take over, you might have to terminate the lease and payout what’s owing.
What is a car loan?
A car loan is a personal loan that serves the purpose of buying a new or used vehicle. Car loans can be secured or unsecured. With a secured loan the vehicle you purchase is considered the collateral. It provides more security to the lender because if you fail to pay your interest on time, the lender can repossess and sell the vehicle. Hence the interest rate is generally lower than for an unsecured car loan. As the name suggests, unsecured car loans don’t have a collateral which means the loan provider cannot sell your car if you fail to service the loan. However, they have other legal means to come after you. With an unsecured loan, you might not be able to borrow as much as with a secured car loan.
Pros & cons: car loan
Pros
✓ Option to pay a deposit or trade-in your old car to reduce the loan amount.
✓ You own the car from the beginning, although the same applies with a Novated Lease.
Cons
✗ Interest & running costs are paid from your post-tax earnings.
✗ No special tax benefit, other than claiming the usual expenses.
✗ With a secured car loan the lender can repossess the car if you fail to pay on time.
✗ No GST benefit, i.e you need to pay for GST and can’t claim it.
What’s better - a car loan or novated lease?
Bottom line is that a novated lease can save you substantial amounts of money compared to a car loan. Taking all the pros and cons into account, you must weigh up what’s best for your unique situation. It would also be helpful to seek advice from an accountant helping you calculate tax savings and making the right decision.
Our novated lease calculator also provides you with a better idea on possible savings and expenses.
