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.
The interest rate on a novated lease depends on various factors relating to you and the car you drive. Generally speaking, novated lease interest rates start from around 7% p.a. but your actual rate will be personalised to you and may be higher.
The interest rate on a novated lease is 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.
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 quoteGet a quote
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.
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:
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).
A novated lease may also include an ongoing management fees plus a one-time establishment 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.
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.
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:
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.