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.
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.
Your credit history
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.
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.
More novated lease guides
Need more information? Read our easy-to-understand novated lease guides.
Written by
CEO
Bevan Guest
Bevan is the CEO of Novated Lease Australia. He has more than 20 years of experience in the automotive and financial services industry.
Reviewed by
Editor
Sean Callery
Sean is an editor and finance journalist. He has over 15 years of international experience covering consumer affairs, lending and personal finance.