A novated lease is a unique way to pay for a car for personal use, because of the tax savings available. But in some respects, it is similar to other forms of car finance. For example, there is interest charged by the lender providing the novated lease finance.
The interest rate on the novated lease is one factor that will determine how much it will cost you to drive your car. But – again because of the tax savings – the interest costs on a novated lease generally have less of an impact on the overall cost of driving your car, compared to a car loan where there is no tax saving available to offset the interest you need to pay.
Let's get into it in more detail.
Interest rates on a novated lease
The interest rate on a novated lease is personalised to you based on your application. It will depend on various factors relating to you, your financial situation and the car you drive.
Novated lease interest rates are typically fixed, meaning any interest costs will be the same throughout the lease term.
Let’s now look at the factors that could impact your novated lease interest rate.
What will my novated lease interest rate be?
Here's a summary of the main factors that could dictate what your novated lease interest rate will be. Of course, the best way to find out what your novated lease will cost you is to get a personalised quote
Get a quoteYour credit history
If you have a clean credit history and high credit score (e.g. no defaults or payday loan applications) you’re seen as a lower risk and you’ll generally qualify for a lower novated lease interest rate than someone with a bad credit score looking for a novated lease.
The finance provider
As you would expect, finance providers vary in terms of the rates they offer on their leases. Novated Lease Australia has access to multiple lenders and we’ll shop around to get you the best deal we can.
If your employer has a default novated lease provider, your finance options could be limited to whatever lenders that provider works with.
In this scenario, a self-managed novated lease could give you the flexibility to compare interest rates from a wider selection of lenders.
Whether you are a homeowner
Applicants who own their own home (with or without a mortgage) generally get a lower rate, because they are ‘asset-backed’ and represent a lower risk to the finance provider.
The age of the car
In most cases, a newer car will mean a lower interest rate as the finance provider will have fewer issues selling the vehicle in the unlikely event that you can’t keep up with the lease payments. That said, novated leases on used cars can still mean big savings.
The type of car
Lenders’ policies can vary here, but some will offer a lower rate on an electric vehicle compared to a traditional petrol or diesel car. That’s on top of the generous additional tax incentives available on EV novated leases.
Your employment history
Finance companies generally like applicants with a strong track-record in their industry. For example, if you only recently became self-employed but have strong experience in your industry, finance providers will see that as a plus.
Your overall financial situation
When it comes down to it, a finance provider wants to be confident that you can comfortably afford the lease payments. That means they may consider your salary, plus what savings and other assets you own that could help you to cover the lease payments if your income was impacted. The better your overall position, the lower your novated lease interest rate is likely to be.
Are novated lease interest rates higher than car loan rates?
Novated lease interest rates are not necessarily higher than car loan rates. The reality is it comes down to which provider you choose for your novated lease, which lenders they have access to and your own situation (credit history etc.)
It is of course possible that you may be able to find a car loan that offers you a lower interest rate than what you can get through a novated lease. After all, a novated lease is a more specialised type of finance so not as many providers offer this option.
However, a novated lease typically still works out considerably cheaper than a car loan, even if the interest rate is higher.
That’s because your lease payments are made from your pre-tax salary. In effect, this means you could be getting a discount on your interest costs that’s equal to your marginal tax rate. The biggest savings are available on electric car novated leases, as eligible EVs are exempt from fringe benefits tax (FBT).
On top of that tax saving on the interest costs, a novated lease offers other savings that a car loan won’t, further offsetting the cost of your lease:
- GST saving on up-front cost of the vehicle
- Income-tax saving on car-running costs
- GST saving on car-running costs
When comparing a car loan to a novated lease, it’s important to look beyond the interest rate and consider the overall cost of driving your car.
For a novated lease, that means the reduction to your take home pay on account of your novated lease payment. For a car loan, it’s your regular loan repayment plus your other car running costs (fuel, insurance, servicing, registration and CTP).
What about novated lease fees?
A novated lease may also include an ongoing management fees plus a one-time establishment fee:
Management/administration fee
Most novated lease companies charge a regular admin fee. This is included in the regular lease payment that’s deducted from your salary. This fee covers the cost of managing your lease and other admin such as reimbursing you for any car-running costs you pay for yourself.
Establishment fees
Most lenders will charge a nominal establishment fee to help cover the cost of assessing your finance application, and setting up the contract. This fee will vary from one finance provider to another.
Again, it’s important to shop around novated lease providers and compare them based on fees and, importantly, the cost of the lease overall.
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Factors that affect the overall cost of your novated lease
While the interest rate on a novated lease and other finance costs certainly has an impact on price, it’s not the only contributor. Here are the main factors that have an impact:
- The interest rate
- Finance and admin fees
- Your choice of vehicle
- Whether you add any accessories or modifications before the vehicle is delivered to you
- The FBT status of the vehicle (EV/PHEV versus petrol diesel car)
- How many kilometres you drive (and therefore your running costs)
- Your location in Australia (this impacts dealer delivery costs and is one of the factors that will determine the cost of your rego/CTP insurance and how much stamp duty you need to pay)
- The cost of your car insurance (as this is also bundled into your lease payment)
- Whether you use the vehicle for business purposes and if so, how much (business use is exempt from FBT)
If you’re comparing novated lease costs, the best way to do this is to look at the total reduction to your take home pay that’s quoted to you. This is essentially the cost of your novated lease. Our experts will talk you through the costs and discuss strategies for minimising them.
Novated lease interest rates FAQ
How will the novated lease interest rates affect me?
The interest rate on a novated lease impacts the regular payments you’ll make for your vehicle. Because of this, it can have a significant influence on the total cost of your lease and ultimately how much your car costs.
Securing a lower interest rate could save you thousands of dollars over the course of your novated lease. The longer your lease term is, the bigger the impact the interest rate typically has.
What factors determine my novated lease interest rate?
Your novated lease interest rate is primarily determined by factors such as your credit score, the lease duration, the vehicle's make and model and your overall financial situation. Broadly speaking, the less risk you present for the lender, the lower your rate is likely to be. In particular, lenders like to see a track record or responsibility with credit and stability in your finances.
Of course, market conditions can also play a role. If interest rates in the economy overall are changing, this is likely to have an impact on the interest rates available on novated leases.
Can my novated lease rate change during the lease term?
In most cases, the interest rate for a novated lease is fixed. This means you’ll have the same regular payment amount throughout the lease period.
How can I get the most competitive interest rate on my novated lease?
To get the most competitive interest rate on a novated lease you’ll need a strong credit history with no credit defaults and low levels of other debt.
But most of all, getting the best deal possible on a novated lease interest rate means shopping around and comparing as many different finance providers as you can. The rates available can vary a lot between providers.
Get the best deal on a novated lease
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Need more information? Read our easy-to-understand novated lease guides.
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Written by
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CEO
Bevan Guest
Reviewed by
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Editor
Sean Callery
