Novated Lease Vs Car Loan: Detailed Comparison

Which will save you more?

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Written byBevan GuestReviewed bySean Callery

If you’re considering a novated lease, there’s a good chance a car loan is the other option you have in mind. Both are ways to pay for a car for personal use, but there are some major differences to weigh up.

In this article, we explain how a novated lease compares to a car loan to help you make an informed decision between the two.

	Novated lease	Car loan
What is it?	A novated lease is a finance arrangement that allows you to pay for your choice of new or used car and its running costs directly from your pre-tax salary through your employer.	A car loan is a loan from a bank or other lender that can be used to purchase a car. The car you buy acts as security for the loan.
Who’s involved	You, your employer and a novated lease provider.	You and a lender.
Vehicle ownership	With a novated lease, you don’t own the vehicle during the lease term. But you have unrestricted personal use of the vehicle throughout the lease, with the option to own it at the end of the term.	With a car loan, you own the vehicle from the start, with no restrictions on usage.
Restrictions	A novated lease is only available on passenger vehicles with a payload capacity below one tonne. Vehicle age restrictions usually apply.	Vehicle age restrictions usually apply to car loans.
Upfront discount on car	With a novated lease there is a GST discount of up to $6,191 on the purchase price of the car. Novated lease companies can also often secure a ‘fleet discount’ for clients.	Generally no upfront discount when you buy a car with a car loan.
How are the payments made?	Your employer deducts the novated lease payment amount from your salary and pays it to the lease provider every time you get paid.	You make the car loan payments yourself directly to the lender weekly, fortnightly or monthly.
What do the regular payments cover?	The cost of leasing the vehicle Related car-running costs (e.g. fuel/charging, insurance, registration and CTP, servicing and tyres) Finance costs and admin fee	The loan amount Interest and fees (car running costs must be covered separately)
Tax implications	Up-front GST discount on vehicle cost Income tax saving as the lease payments lower your taxable income GST saving on packaged car-running costs Lease may be subject to fringe benefits tax (unless it’s an eligible EV or PHEV)	No tax implications or benefits
Interest rates	Novated lease interest rates vary based on your application and credit history. The interest rate is fixed for the life of the lease.	Car loan interest rates vary based on your application and credit history. The interest rate is usually fixed for the life of the loan.
Fees	Finance establishment fee Regular novated lease admin fee	Finance establishment fee Regular car loan servicing fee
Balloon payment	Known as the ‘residual payment’, this is a larger one-off payment required at the end of the novated lease for you to own the car outright.	You may have the option to include a balloon payment at the end of your car loan term. This is a large one-off payment that lowers your regular repayments.
Options at the end of the term	Make the residual payment to own the car outright. Trade in the car and start a new lease with a new car. Renew/extend your lease with the same car.	At the end of the finance term the loan is closed out and any obligations to the lender end.
How long is the term?	A novated lease term can be any duration between six months and five years.	Car loan terms are generally between one and seven years.
Eligibility	Must be an employee of a company that offers novated leasing as a benefit. Must be an Australian citizen or permanent resident. Must be over 18 years of age. Must pass a credit check and meet the finance provider’s other criteria (bad credit novated leases are available).	Must be an Australian citizen or permanent resident. Must be over 18 years of age. Must pass a credit check and meet the finance provider’s other criteria.

Novated lease vs car loan: Pros and cons of each

Depending on your situation and priorities, there are pros and cons to a novated lease and a car loan. Here are the main ones.

Novated lease pros

Allows you to pay for a car and running costs using your salary before tax is deducted meaning you pay less tax (i.e. you salary sacrifice the cost of your car to lower your taxable income).
You get a GST discount on the purchase price of the car and packaged running costs.
There’s a significant extra tax saving available if you novate an eligible electric car or plug-in hybrid as they are exempt from fringe benefits tax.
A novated lease provider assists with establishing the lease, finding you a car (potentially with a further ‘fleet discount’) and managing your lease from start to finish.

Novated lease cons

Your employer must agree to offer novated leasing as a benefit (not all employers do this).
If you change jobs during the lease term, the novated lease will need to move with you (it is attached to the employee, not the employer).
There is a residual payment due at the end of the lease, which must be made using after-tax money (e.g. your savings or the trade in value of the car).
Novated leases on petrol and diesel cars are subject to fringe benefits tax (FBT).

Car loan pros

No need to involve your employer in the arrangement.
Options for longer terms than a novated lease (up to seven years).
Payments can generally be made weekly, fortnightly or monthly.
You may have the flexibility to make extra repayments to pay off the loan early.
You have full ownership of the car from the start of the loan term.

Car loan cons

No GST saving on the upfront cost of the car.
All payments must be made with after-tax funds (there is no income tax saving available).
Your car running costs must be covered separately (a car loan typically can only cover the purchase price of the vehicle itself).

	Novated lease	Car loan
Vehicle price (Tesla Model 3 RWD)	$67,142	$67,142
GST saving on vehicle	-$5,791	n/a
Weekly cost	$221 (car and running costs)	$390 (car and running cost)
Tax saving over 5 years (GST & income tax)	$39,216	$0
Total cost of paying for car & running costs over 5 years	$76,504 (includes residual payment)	$101,400
Difference		+$24,896

* Calculation is based on a driver in NSW with an annual gross salary of $120,000 driving 15,000km per year. Running costs include: electricity, comprehensive insurance, registration and CPT, servicing and tyres. Pricing is accurate as of January 2024. This is an example for illustrative purposes only based on the assumptions described. Your cost and savings may be different depending on your situation.

	Novated lease	Car loan
Vehicle price (Toyota RAV4 Edge AWD)	$61,199	$61,199
GST saving on vehicle	$5,286	n/a
Weekly cost	$314 (car and running costs)	$391 (car and running cost)
Tax saving over 5 years (GST & income tax)	$16,076	$0
Total cost of paying for car & running costs over 5 years	$98,965 (includes residual payment)	$101,400
Difference		+$2,435

* Calculation is based on a driver in NSW with an annual gross salary of $120,000 driving 15,000km per year. Running costs include: fuel, comprehensive insurance, registration and CPT, servicing and tyres. Pricing is accurate as of 21 December 2023. For this example, the car loan interest rate is assumed to be 8.00% p.a. with no loan fees. This is an example for illustrative purposes only based on the assumptions described. Your cost and savings may be different depending on your situation.

Novated lease vs car loan: income tax and GST benefits explained in more detail

The tax treatment of a novated lease is how it differs most from a car loan, so it’s worth explaining this in a bit more detail.

A novated lease uses an employee’s pre-tax and post-tax salary to make finance repayments to a leasing company. The pre-tax payments reduce the employee’s total taxable income. This can even place the employee into a lower tax bracket, resulting in significant tax savings.

As the leasing company procures the vehicle, the borrower will not pay GST on the initial purchase price of the vehicle. GST included in the lease charges can be claimed by the employer, which is then passed on to the employee leasing the vehicle.

The leasing company will estimate running costs for the vehicle, which are included in regular lease repayments. Running costs include everything you might pay for in relation to the vehicle’s use throughout the term, such as:

Registration
Insurance
Servicing costs
Replacement tyres
Petrol/charging costs
Vehicle repairs

You pay no GST on running costs for your vehicle under a novated lease. These are estimated by the leasing company and bundled into the total lease amount.

However, there is GST payable on the vehicle's residual value, which is the amount required as a final payment in order for you to own the vehicle.

If you're buying an EV, the tax savings available through a novated lease often far exceed the financial incentives available to EV drivers who buy their car outright. In some situations you may still be able to take advantage of a state government EV incentive, while also enjoying the tax benefits of a novated lease. You can discuss this with one of our expert consultants.

Commonly asked questions about an EV novated lease

What is a novated lease?

A novated lease is a three-party agreement between an employee, their employer, and a leasing company. It allows employees to lease a vehicle using their pre-tax income. This arrangement lowers your taxable income (so you pay less tax) and means you can bundle vehicle expenses like registration, insurance, and maintenance into one convenient payment.

What is a car loan?

A car loan is a finance option where you borrow a sum of money to purchase a vehicle. You're responsible for repaying the loan amount plus interest over a set period. Unlike a novated lease, car loans do not involve your employer and do not offer tax benefits related to the vehicle's running costs.

What are the key differences between a novated lease vs car loan?

Tax advantages: Novated leases offer significant tax benefits by reducing your taxable income and allowing GST savings on the purchase price and running costs. Car loans do not provide these tax benefits.
Vehicle ownership: With a car loan, you own the vehicle outright from the start. In contrast, a novated lease offers options at the end of the lease term: you can either take ownership by paying the residual value, extend the lease, or upgrade to a new vehicle.
Running costs: Novated leases can include vehicle running costs in the lease payments, allowing for better budget management. Car loans cover only the vehicle's purchase price, leaving you to manage running costs separately.
Flexibility: Novated leases offer more flexibility at the end of the lease term regarding vehicle ownership options. Car loans provide a straightforward path to ownership but with less flexibility in terms of vehicle upgrade or exchange.

Which is cheaper: a car loan or a novated lease?

In most situations, a novated lease will save you money compared to a car loan due to the potential to reduce your tax bill.

However, when comparing a novated lease to a car loan, it’s important to remember that a novated lease generally includes car-running costs, which can make the repayment seem high compared to a car loan.

With a car loan, you will still have these car running costs to cover separately, but without the ability to offset any of the expense through tax savings.

Can I use a novated lease for any type of vehicle?

You can use a novated lease for both new and used vehicles, including cars, SUVs, and utes (with a payload of less than one tonne). The choice of vehicle may affect the lease terms and benefits. For example, an electric vehicle could bring considerable extra savings due to the government incentives available.

Are there any restrictions on home many KMs you can drive with a novated lease compared to a car loan?

There are no restrictions on how much you can drive your car with a novated lease compared to a car loan. Your lease running cost budget will be calculated based on your estimated KMs, but this can be increased or decreased at any time during the lease.

How does the end-of-term process differ between a novated lease and a car loan?

At the end of a novated lease term, you can choose to pay the residual value and take ownership of the car, extend the lease, or start a new lease by paying out the residual using the trade-in value of the car you leased originally.

With a car loan, you own the vehicle from the start and the finance company retains an interest in it until the final loan repayment is made.

Is it easier to upgrade my vehicle with a novated lease or a car loan?

Upgrading to a new vehicle is generally easier with a novated lease as this is part of the service novated leasing providers offer. You’ll get help with trading in your existing car and transitioning to a new lease. By comparison, the lender that offers you a car loan is unlikely to help you with the process of upgrading.

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